The Ostrich Effect and due diligence investigations

September 10, 2018/ Marcy Phelps / Due diligence / 2 comments

As an investigator and an information nerd, I was intrigued by a podcast from the NPR Hidden Brain Series about the Ostrich Effect. We’ve all heard about it – burying your head in the sand to avoid learning what we don’t want to know. It seems that this ‘no spoilers’ mentality, as NPR describes it, causes us to avoid information that’s painful or causes us stress, even when we know it’s good for us.

In the podcast, we hear from researchers studying this tendency, also known as “information aversion.” It’s what causes us to delay talking with a medical professional about a physical problem or take a break from the news in light of the current political environment. Afterwards, I wondered if information aversion is what’s stopping some business professionals from conducting pre-deal due diligence.

I’ve spoken with many entrepreneurs, deal brokers, and others in various industries involved in business transactions – maybe venture capital or an M&A situation. They look at financials, scan the regulatory landscape, and perhaps check Google or a couple of databases to verify the company’s legal status. But they never take a deep dive into the backgrounds of the key people involved in the transaction, even though they all have stories to tell about deals gone bad, because “they weren’t who they said they were.”

Due diligence background investigations can make or break an investment. I’ve seen investors back out after discovering one of the key players lied in supplied information, because, when someone signs documents with false claims, they’ve committed a crime, and the client chose to avoid finding out the hard way what other crimes this person might commit. Another client passed on the opportunity to go into business with someone after learning about their history of suing partners and not paying their bills. Still another wanted to know more about potential partners before sharing their finances and other proprietary information.

So why do so many skip taking this kind of deep dive into a potential partner’s background? Perhaps it’s information aversion and a way to avoid the possibility of the deal falling through. After all the time, money, and effort – and because they need or want this to happen – they don’t want to know what they don’t know.

Getting into a bad business arrangement, though, is bad for business. Ignorance may be bliss for the time being, but imagine the blow back after, for example, naming a building for a donor with some skeletons in their closet. Wouldn’t you want to know beforehand?

But it seems that telling scary stories won’t motivate people to become informed. According to the researchers interviewed in this NPR podcast, fear tactics don’t help and, in fact, will only make the situation worse. What they learned from the data, though, is that people will seek out information when the situation doesn’t seem so serious.

So, rather than focusing on all the stories about the scary things that can happen when you skip the due diligence, let’s focus on the positive – what someone gains when they dare to take a good, hard look at the facts:

An investigation, whether it turns out positive or negative, provides peace of mind. No wondering about what you wish you knew, no dealing with the what-ifs. Just knowing that you did what you could do. And who wouldn’t want that?

Due diligence isn’t perfect and no investigator can guarantee that things won’t eventually go bad. But information is power. The more you know, the less uncertainty, and the better you can deal with whatever you may encounter along the way.

Don’t be an ostrich. Find out what you don’t know – even just for the peace of mind.

Tags information aversion