1. Definition of bias during execution of M&A tasks

Information systems research on mergers and acquisitions is limited, especially for the early phases of the M&A process. Here, we are taking a closer look at tasks in the M&A process to determine if and how information systems methods can help to mitigate some of the issues in M&A endeavors.

1.1 Introduction

Overall, decisions in the M&A process are high impact decisions with high risk of failure. Decision-makers´ informedness, M&A experience and attention determine the outcome of decisions in the M&A process. Decision-maker isolation, especially in the early phases of the M&A process and self-interest of participants can skew the results of decision-making in a high-risk environment, which then deviate from norm or rationality. Cognitive bias, or bias in short, is defined as a systematic deviation from norm or rationality in judgment.

Using the task model of the semantic object model of Ferstl and Sinz, we analyze how decision makers execute the decision tasks in the process and where cognitive bias occurs.

1.2 The Semantic Object Model approach

The SOM approach, a business system modelling approach, is introduced to formally express the issues and to locate where biases can occur [FeSi06]. A business system is conceptualized as an open, objective-driven, and socio-technical system.

In SOM, tasks and the resources that execute tasks are modeled separately. Resources to execute tasks can be human resources and/or application systems.

Outside view of task definition in SOM

From an outside view within the SOM approach, each task has pre- and post-events, goals, and objectives and often several procedures that can be used to execute the task [Figure 2]. Goals define the set of possible future states of the task object schema while objectives allow selection of the right future states of the task object schema.

Inside view of tasks in SOM

From an inside view, the procedures of a task contain actions and action control. Action control is started by pre-events and manages and monitors the execution of actions to achieve the goals and objectives of the task. As a result, the task object schema is put into the result state and corresponding post events are generated.

Procedures are often specific to the resources that execute the task, so personnel might use different procedures than a combination of personnel and application systems.

Step-by-step execution of tasks

Let us assume the task is being executed by personnel. Tasks are executed in the following steps:

Interpretation of goals
Interpretation of objectives
Selection of a procedure to be executed (if and only if there are several procedures)
Carrying out action control
Interpretation of Pre-Events
Carrying out actions
Finalize action control, create the final state of the task object schema including the degree of fulfilment of the objectives of the task and generate post-events

Each of these steps can be affected by cognitive bias.

1.3 Bias in SOM

How can the impact of bias be described within the SOM methodology? Bias is defined as a systematic deviation from norm or rationality in judgment. From an outside view of a task, judgment means that one or more decisions are taken during the execution of a task. Such tasks are called decision tasks in SOM.

Outside view of tasks

Judgment allows the selection of the right future states of the task object schema, while “right” means a rational or norm-based decision. So, when bias occurs and goals are fulfilled, suboptimal degrees of fulfilment of objectives are achieved. Hence, the impact of bias only appears within decision tasks in SOM and skews the selection of future states of the task object defined by objectives.

Inside view of tasks

Now we look at the inside view of a task. Resources select and execute the procedure of a task and take decisions. The separation of tasks and resources can be used to locate bias. We assume that cognitive bias always occurs within the resources assigned to a task, so bias can occur in people and application systems that execute a task. Bias is not part of the definition of tasks on a type level, but it can massively influence the execution of an instance of a task.

Summary

In this paper, the concept of bias was introduced into the SOM methodology. The location and impact of bias was defined from an outside and inside view of a task. Further work will address specific types of bias in M&A-related tasks and the use of heuristics for M&A-related tasks.

It is important to note that in literature, human bias and algorithmic bias are described independently of each other. Here, in our approach, during the execution of semi-automated tasks, which have people and application systems assigned, both classes of bias, human and application system bias can occur in parallel. With an increasing use of application systems in mergers and acquisitions, esp. leveraging artificial intelligence, this is an important consideration.

Sources

[FeSi06] Ferstl, O.K., Sinz, E. J., Modeling of Business Systems Using SOM. In: Bernus, P. et al., Handbook on Architectures of Information Systems. Berlin, 2006, S. 347 - 367.

[Popp23] Popp, K.M., Automation of Mergers and Acquisitions: M&A Strategy Processes: Theory, Tasks and Automatability. Books on demand, Norderstedt, 2023.

This relates to my new book “Automation of Mergers and Acquisitions“.