Investment due diligence is a complex and important task that requires not only investors to collect and analyze a large amount of information, but also investors to use logical thinking to summarize, reason, judge and evaluate the information. However, in practice, investors are often affected by some psychological biases and cognitive misjudgments, resulting in inaccurate or incomplete due diligence results, thus affecting the quality of investment decisions. Here are some common logical fallacies in investment due diligence and how to avoid or reduce the impact of these fallacies through some methods and techniques.

Confirmation bias (confirmation bias): refers to people's tendency to seek and value information that is consistent with their existing views or assumptions, while ignoring or questioning the opposite or irrelevant information. In investment due diligence, if investors have a preconceived impression or expectation of the target enterprise or project, they may only focus on the evidence that supports their own views and ignore the evidence that refutes their own views, resulting in biased or one-sided due diligence results. For example, if investors believe that a certain industry has great development potential, they may only focus on the advantages and opportunities within the industry and ignore the threats and challenges outside the industry.

Solution: In order to avoid confirmation bias, investors should maintain an open and objective attitude and conduct a comprehensive and balanced analysis of the target company or project, while also considering their own possible blind spots and limitations. In addition, investors can also invite some independent and professional third-party institutions or persons to participate in the due diligence process to provide different perspectives and opinions.

anchoring effect (anchoring effect): When people make judgments or decisions, they will be affected by the first information or numbers they come into contact with, and thus rely on or bias the information or numbers they come into contact with later. In investment due diligence, if an investor is exposed to a certain guiding or suggestive information or figure at the beginning, he or she may over-rely or trust it, thus affecting the subsequent evaluation of other information or figures. For example, if an investor is exposed to the valuation or yield of a target business or project at the outset, it may be used as a benchmark to compare or adjust other relevant information or figures.

Solution: To avoid the anchoring effect, investors should try to avoid exposure to, or critical analysis and validation of, information or numbers that are instructive or suggestive in the due diligence process. In addition, investors can also obtain information or numbers from multiple sources and channels for cross-validation and comparative analysis.

Representation bias (Representativeness bias): refers to people's tendency to classify something into a certain category or group based on certain characteristics or similarities between characteristics, while ignoring other related information or probabilities. In investment due diligence, if an investor classifies a target enterprise or project into an industry or market based on certain superficial characteristics, he or she may ignore its internal differences or diversity, resulting in misjudgments or loopholes in due diligence results. For example, if an investor classifies a target enterprise or project into a certain stage of development or level of competitiveness based on its geographical location, size, brand and other characteristics, it may ignore its actual operating condition, financial condition, market share and other factors.

Solution: In order to avoid representativeness bias, investors should conduct an in-depth and detailed analysis of the target company or project, considering not only its surface characteristics, but also its internal characteristics and external environment. In addition, investors can also calculate and evaluate the true probability and value of the target enterprise or project through a number of statistical methods and data analysis tools.

Emotional influence (emotional influence): When people make judgments or decisions, they will be affected by subjective factors such as their emotions, psychological states, and preferences, thereby affecting their rationality and objectivity. In investment due diligence, if investors are influenced by subjective factors such as their own emotions, psychological states, preferences, etc., they may be overly optimistic or overly pessimistic about the target company or project, resulting in biased or distorted due diligence results. For example, if an investor has a strong interest or fondness for a target business or project, he or she may turn a blind eye or downplay its problems or risks.

Solution: In order to avoid emotional influence, investors should maintain a calm and rational attitude, objective and fair analysis of the target enterprise or project, but also consider their own possible preferences or biases. In addition, investors can also adjust their emotions and psychological state through some methods and techniques, such as taking deep breaths, relaxing muscles, listening to music, etc.

These are some of the common logical fallacies in investment due diligence, and how to avoid or reduce the impact of these fallacies through some methods and techniques. Of course, in practice, there may be other types and forms of logical fallacies that need to be identified and dealt with by investors on a case-by-case basis. In short, when making investment due diligence, investors should use logical thinking to analyze from multiple angles, multiple levels, and multiple dimensions. At the same time, they should also pay attention to avoid or reduce the influence of psychological bias and cognitive misjudgment. Improve the accuracy and completeness of due diligence results, thereby improving the quality of investment decisions.

In order to let you better understand and use logical thinking, I will introduce you to some specific cases of Shangpu consulting service customers, which can be analyzed briefly. However, these cases are for reference only and do not represent the views or recommendations of Champ Consulting.

Case 1: An investment institution invests in a new energy vehicle company. The company has self-developed battery technology and intelligent driving system, and the market prospect is promising. However, during the due diligence process, the investment agency identified the following issues:

Although the company's battery technology is advanced, it is costly, and there are supply chain risks and safety hazards.

Although the company's intelligent driving system is powerful, it relies on the stability and security of the Internet and data, and there are legal and ethical disputes and challenges.

Although the market share of the company is growing rapidly, it is facing fierce competition and regulatory pressure, and there are problems of user satisfaction and loyalty.

The investment institution used logical thinking to conduct a comprehensive and in-depth analysis of the company, assessing its investment value and risk from the financial, legal, market, technical, management and other aspects, and comparing it with other companies in the same industry or market. Ultimately, the investment agency decided to abandon its investment in the business and instead look for other, more appropriate investment targets.

Case 2: An investment institution invests in an online education platform. The platform has a large amount of high-quality educational content and resources, and the user scale is huge. However, during the due diligence process, the investment agency identified the following issues:

Although the educational content and resources of the platform are diversified, the quality is uneven, and there are problems of copyright and intellectual property rights.

Although the user scale of the platform is large, the loss rate is high, and there are problems of unclear user portraits and mismatch of user needs.

Although the profit model of the platform is diversified, the income is unstable, and there are problems of high operating costs and tight cash flow.

The investment institution used logical thinking to conduct a comprehensive and in-depth analysis of the platform, and evaluated its investment value and risk from the aspects of finance, law, market, technology, management, etc., and compared it with other platforms in the same industry or market. In the end, the investment institution decided to make a conditional investment in the platform and put forward some suggestions for improvement and optimization.