Company’s market by purchasing a major rival.

A CEO decides that he wants to greatly expand the company’s
market by purchasing a major rival. This acquisition would double the
company’s market share. However, several of his top managers warn
him that such a purchase would require the company to take out a
huge amount of debt to finance this merger, and that many of these
large mergers have failed. They also point out that the organizational
culture of the other company is very different and that managing this
merger would be very difficult. Nonetheless, the CEO insists that he
can overcome the odds and plans to go through with the merger.
What kind of decision-making bias do you think this represents, and
why? What steps should this leader take to avoid this bias? Support
your answer with references to at least one of the three background
readings.

Sample Answer

The decision-making bias that the CEO is exhibiting in this scenario is called overconfidence bias. Overconfidence bias is a tendency to overestimate one’s own abilities and chances of success. In this case, the CEO is overestimating his ability to overcome the challenges of a large merger, such as the financial burden, the cultural differences, and the management difficulties.

Full Answer Section

There are a few reasons why the CEO might be exhibiting overconfidence bias. One reason is that he may be motivated by a desire to achieve a major coup. He may see the merger as a way to make a big splash and to significantly increase the company’s market share. Another reason is that he may be relying on his past successes to inform his decision-making. He may have had a history of successful mergers in the past, and he may be overconfident that he can replicate that success in this case.

The CEO can take a number of steps to avoid overconfidence bias in this situation. First, he should gather more information about the merger. He should talk to experts in the field of mergers and acquisitions, and he should get a detailed financial analysis of the deal. Second, he should get input from his top managers. They may have insights that he has overlooked, and they may be able to point out potential risks that he is not aware of. Third, he should be willing to listen to dissenting opinions. If his top managers are warning him about the risks of the merger, he should take their concerns seriously.

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