9 ms·

The idea is that the bidder's precision signals confidence, and that low confidence signals amenability to negotiation, and that negotiation leads to poorer out

The idea is that the bidder's precision signals confidence, and that low confidence signals amenability to negotiation, and that negotiation leads to poorer outcomes for the bidder. The HBS paper they cite on M&A [0] is most interesting, to my view, in the sense that both players in the M&A "game" are presumably quantitative. One would think a social psychology effect would be less so in a game between quants, but their interviews suggest perceived confidence does matter. The precision signals that the bidder is confident pricing and negotiating analytically. The thing I am curious about in [0] is that they report the bid price per share, and not (unless I missed it) the asking price. I don't know how M&A "works". If you and I are both estimating the value of a good, if our estimates are close it's one thing and if they are far apart it's another. Are rounders losing because their estimates are less accurate, relative their counterparty's? [0] https://www.hbs.edu/ris/Publication%20Files/16-058_27d73983-3441-4628-906c-10ce5fb7ac47.pdf https://www.hbs.edu/ris/Publication%20Files/16-058_27d73983-...

bombcar 4y ago
I also suspect that sometimes the bid price is a signal to others besides the company being bought - and a number that’s easy to digest might help in media, etc.
dmurray 4y ago
> I don't know how M&A "works". In general it's the buyer who names a price first. Take the current Twitter acquisition, the board weren't trying to sell the company at all and Elon Musk made an unsolicited bid of $54.20/share. Other times the board may be actively looking for a buyer and have a price in mind, but it will still typically be up to the buyer to propose a deal. Not least because the number isn't the only thing being negotiated: the buyer will likely have a range of stipulations or conditions attached to the bid so every bid will look different.
vasco 4y ago
> One would think a social psychology effect would be less so in a game between quants One would, but the little I've seen & heard about due dilligence around M&A (and startup investments for that matter) tells me it's nothing close to "quant". People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal. Perhaps in public company acquisitions there's more sophistication, but I really doubt that.
- JumpCrisscross 4y ago
  > it's nothing close to "quant" This is accurate. For public companies, the quant part has been calculated by the market. Everything that remains is, almost by definition, in the realm of the irrational, unknowable and/or political (usually at the Board level, though government factors could also be involved).
  - sitkack 4y ago
    > quant part has been calculated by the market And then you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market.
    - JumpCrisscross 4y ago
      > you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market. This discussion devolves into useless semantics if we rely on colloquial definitions. In case it wasn't clear, the predictable, explicable parts of a public company's value are generally priced in by the market. (If they're not, we're in a chaotic environment and nobody's doing classic M&A.) It's the other stuff, which we put in a bucket titled "irrational," M&A bankers address. This is why the cash-flow models bankers prepare are largely performative. Every buyer builds their own models. And most of the time, the market does the modeling for them. The part the market can't model, the things one seeks to do with control, is the main attraction. I caveated the comment because private company M&A is different. There, the negotiation does focus on valuation. Quality of assets. Current cash flows. Strength of contracts. Discount rates tied to the actual cost of financing versus an MBA model. While public company M&A dresses financial strengths and weaknesses in the language of partnerships, private company M&A seeks to address political issues (e.g. a senile founder with voting control) through talk of fundamentals.
      - sitkack 4y ago
        Thanks, that makes more sense.
noduerme 4y ago
>> If you and I are both estimating the value of a good, if our estimates are close it's one thing Yeah, if I say €193,345 and they say €1 million, that last five euro would look a little stupid. This is a scenario where already being close to knowing their closing figure is everything. The proper analysis here would be: What's the chance you get your <1% edge versus losing a deal by being stuck on a number too early?
runarb 4y ago
> If you and I are both estimating the value of a good, if our estimates > are close it's one thing and if they are far apart it's another. Are > rounders losing because their estimates are less accurate, relative their counterparty's? I belive it is normally the one with the most optimistic evaluation that wins. It is called "winner's curse": https://en.wikipedia.org/wiki/Winner%27s_curse https://en.wikipedia.org/wiki/Winner%27s_curse
Loic 4y ago
You have exactly the same effect in play if somebody calls you and ask how long it takes for you to arrive to a meeting point. If you answer 10 minutes, it will be seen as an approximation between 10 and 20 minutes. If you answer 8 minutes, it will be considered as 8 +/- 1 minute. This is really impressive, this works each time. Especially if you are on ski slopes and you have two groups trying to meet at a given point. 10 minutes == "We can do another run or two". 8 minutes == "We need to pay attention, they are coming right now!"
- osrec 4y ago
  That's a great example, with the arrival time estimates. I wonder whether this effect itself would diminish as more people get to know about it...
  - mbreese 4y ago
    And yet, how often are prices at a store still quoted as $4.95? or $10.99? We all know what the psychology of pricing is, and yet it still persists. People are strange and illogical creatures.
    - dymk 4y ago
      Those are "round" numbers by social convention, and our psychology rounds them down.
      - iso1631 4y ago
        I think I automatically round 10.99 to 10, 9.99 to 10, 4.95 to 5, etc.
        V-2 4y ago
        The first case is bizarre to me, unless that's a typo
        4y ago
bumby 4y ago
>One would think a social psychology effect would be less so in a game between quants Is the presumption that a "quant" bases their decision on logic alone and that's why they wouldn't be susceptible so social psychology? Maybe someone with more background can elaborate but I think behavioral psychology might refute that assumption.
t_mann 4y ago
The way M&A usually works is that all sides have bankers/advisers who run Excel spreadsheet calculations that come out with different precise numbers depending on a couple of scenario parameters. Those are put on PowerPoint slides and presented to management. The decision whether to go with one of the precise numbers (or some aggregate thereof), or some close by round number has more to do with bidding tactics, game theory and psychology, so I think this research actually quite interesting. If you're a manager involved in some bidding process, what this article is telling you could be somewhat loosely rephrased as "use the Excel numbers rather than the ones that stuck in your head after the presentation", which is interesting advice.
- gowld 4y ago
  If your Excel is done properly, you wouldn't have the sigfigs for a precise number.
- t0mas88 4y ago
  I've seen a few M&A experts run their spreadsheets and then the negotiations happened. In reality 90% of the outcome was determined by how competitive the bidding was and how willing the target company seemed to walk away. All spreadsheets went out the window in the first phase.
tracerbulletx 4y ago
It seems like it would also affect the mental granularity of any counter offer. If I bid $10,000 someone might be like no way to high how about $8,000! Cause the significant digits were working with are in the 1000s. But if I say $10,542. They might be more likely to focus on the detail and come back with 10,100 or something.

bombcar 4y ago

I also suspect that sometimes the bid price is a signal to others besides the company being bought - and a number that’s easy to digest might help in media, etc.

dmurray 4y ago

> I don't know how M&A "works". In general it's the buyer who names a price first. Take the current Twitter acquisition, the board weren't trying to sell the company at all and Elon Musk made an unsolicited bid of $54.20/share. Other times the board may be actively looking for a buyer and have a price in mind, but it will still typically be up to the buyer to propose a deal. Not least because the number isn't the only thing being negotiated: the buyer will likely have a range of stipulations or conditions attached to the bid so every bid will look different.

vasco 4y ago

> One would think a social psychology effect would be less so in a game between quants One would, but the little I've seen & heard about due dilligence around M&A (and startup investments for that matter) tells me it's nothing close to "quant". People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal. Perhaps in public company acquisitions there's more sophistication, but I really doubt that.

JumpCrisscross 4y ago
> it's nothing close to "quant" This is accurate. For public companies, the quant part has been calculated by the market. Everything that remains is, almost by definition, in the realm of the irrational, unknowable and/or political (usually at the Board level, though government factors could also be involved).
- sitkack 4y ago
  > quant part has been calculated by the market And then you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market.
  - JumpCrisscross 4y ago
    > you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market. This discussion devolves into useless semantics if we rely on colloquial definitions. In case it wasn't clear, the predictable, explicable parts of a public company's value are generally priced in by the market. (If they're not, we're in a chaotic environment and nobody's doing classic M&A.) It's the other stuff, which we put in a bucket titled "irrational," M&A bankers address. This is why the cash-flow models bankers prepare are largely performative. Every buyer builds their own models. And most of the time, the market does the modeling for them. The part the market can't model, the things one seeks to do with control, is the main attraction. I caveated the comment because private company M&A is different. There, the negotiation does focus on valuation. Quality of assets. Current cash flows. Strength of contracts. Discount rates tied to the actual cost of financing versus an MBA model. While public company M&A dresses financial strengths and weaknesses in the language of partnerships, private company M&A seeks to address political issues (e.g. a senile founder with voting control) through talk of fundamentals.
    - sitkack 4y ago
      Thanks, that makes more sense.

noduerme 4y ago

>> If you and I are both estimating the value of a good, if our estimates are close it's one thing Yeah, if I say €193,345 and they say €1 million, that last five euro would look a little stupid. This is a scenario where already being close to knowing their closing figure is everything. The proper analysis here would be: What's the chance you get your <1% edge versus losing a deal by being stuck on a number too early?

runarb 4y ago

> If you and I are both estimating the value of a good, if our estimates > are close it's one thing and if they are far apart it's another. Are > rounders losing because their estimates are less accurate, relative their counterparty's? I belive it is normally the one with the most optimistic evaluation that wins. It is called "winner's curse": https://en.wikipedia.org/wiki/Winner%27s_curse https://en.wikipedia.org/wiki/Winner%27s_curse

Loic 4y ago

You have exactly the same effect in play if somebody calls you and ask how long it takes for you to arrive to a meeting point. If you answer 10 minutes, it will be seen as an approximation between 10 and 20 minutes. If you answer 8 minutes, it will be considered as 8 +/- 1 minute. This is really impressive, this works each time. Especially if you are on ski slopes and you have two groups trying to meet at a given point. 10 minutes == "We can do another run or two". 8 minutes == "We need to pay attention, they are coming right now!"

osrec 4y ago
That's a great example, with the arrival time estimates. I wonder whether this effect itself would diminish as more people get to know about it...
- mbreese 4y ago
  And yet, how often are prices at a store still quoted as $4.95? or $10.99? We all know what the psychology of pricing is, and yet it still persists. People are strange and illogical creatures.
  - dymk 4y ago
    Those are "round" numbers by social convention, and our psychology rounds them down.
    - iso1631 4y ago
      I think I automatically round 10.99 to 10, 9.99 to 10, 4.95 to 5, etc.
      - V-2 4y ago
        The first case is bizarre to me, unless that's a typo
        4y ago

bumby 4y ago

>One would think a social psychology effect would be less so in a game between quants Is the presumption that a "quant" bases their decision on logic alone and that's why they wouldn't be susceptible so social psychology? Maybe someone with more background can elaborate but I think behavioral psychology might refute that assumption.

t_mann 4y ago

The way M&A usually works is that all sides have bankers/advisers who run Excel spreadsheet calculations that come out with different precise numbers depending on a couple of scenario parameters. Those are put on PowerPoint slides and presented to management. The decision whether to go with one of the precise numbers (or some aggregate thereof), or some close by round number has more to do with bidding tactics, game theory and psychology, so I think this research actually quite interesting. If you're a manager involved in some bidding process, what this article is telling you could be somewhat loosely rephrased as "use the Excel numbers rather than the ones that stuck in your head after the presentation", which is interesting advice.

gowld 4y ago
If your Excel is done properly, you wouldn't have the sigfigs for a precise number.
t0mas88 4y ago
I've seen a few M&A experts run their spreadsheets and then the negotiations happened. In reality 90% of the outcome was determined by how competitive the bidding was and how willing the target company seemed to walk away. All spreadsheets went out the window in the first phase.

tracerbulletx 4y ago

It seems like it would also affect the mental granularity of any counter offer. If I bid $10,000 someone might be like no way to high how about $8,000! Cause the significant digits were working with are in the 1000s. But if I say $10,542. They might be more likely to focus on the detail and come back with 10,100 or something.