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
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.