Key Takeaways

  • Adi Filipovic applies behavioral economics from Daniel Kahneman and Richard Thaler (whom he studied under at Chicago) directly to private equity deal screening.
  • Sourcing teams fall prey to the endowment effect when junior professionals champion mediocre assets solely because their cold outreach succeeded.
  • Initial indications of interest create psychological price anchors that distort valuation judgment, even after four weeks of confirmatory diligence prove the initial bid was uninformed.
  • Resurgens Technology Partners uses structured decision checkpoints to decouple deal evaluation from the psychological sunk costs of sourcing.

The Sourcing Bias and the Endowment Trap

Private equity deal flow generates an internal bias that rarely appears in financial models. Junior deal leads spend hundreds of hours conducting outbound outreach into fragmented software sectors. When a founder finally answers, the psychology of ownership takes over before the investment committee ever reviews the confidential information memorandum.

Filipovic traces this breakdown directly to Richard Thaler's work on behavioral economics. As Filipovic notes from taking two classes with Thaler at Chicago, human beings value assets more highly simply because they feel personal ownership over them. In private equity, that sense of ownership attaches at the moment of initial contact:

“Endowment effect is like because I did it because it's mine. And you see it as like I sourced this deal. I cold call that nobody picks up the phone anymore. They responded to me. I got them on the phone. Seems like a reasonable company. It must be a good deal.”

When deal originators equate the difficulty of securing an initial meeting with the intrinsic quality of the business, the investment committee receives a skewed thesis. The sponsor ends up defending an asset to justify the sweat equity expended to get it into the pipeline.

The Early Bid Anchoring Problem

The second systematic distortion occurs during the bid process. Investment banks and intermediaries routinely force sponsors to submit initial valuations based on sparse marketing materials. Once an investment team writes down a valuation number, that figure acts as a psychological magnet for the remainder of the diligence process.

Filipovic describes how easily early numbers corrupt later objective analysis, drawing on Daniel Kahneman's work in Thinking, Fast and Slow:

“So there's anchoring, right? It's like if you bid this price, it could be completely silly. We get a sim that has no information on it and then you get forced to bid a price and then four weeks later you know 10 times more than you knew earlier. But the fact that you posted a uninformed number is an anchoring point of like how far you can move from it.”

Even when 30 days of accounting, commercial, and technical diligence uncover structural flaws, deal teams resist dropping their purchase price below the early anchor. They adjust financial projections upward to justify the initial submission rather than walking away or repricing the asset downward.

Why It Matters

When deal volume compresses and software multiples reset, behavioral blind spots become the primary source of underwriting error. Sunk-cost conviction and arbitrary bid anchors explain why sponsors repeatedly overpay for marginal assets in competitive processes. Firms that decouple diligence findings from initial pricing anchors will avoid deploying expensive equity into mispriced software assets.