Trying to make rational decisions while employing intuitive reasoning: A look at the due-diligence process using the dual-system reasoning model

Abstract

The main goal of this study is to analyse the utilisation of dual-system reasoning when assessing new ventures. Particularly, the study examined whether investors activate only 'system 2' and apply rational rules during their due-diligence, or if they employ 'system 1' as well, and also use intuitive reasoning during this assessment. Interviews with venture capital managers reveal that during due-diligence investors apply both systems, simultaneously. Investors make abundant efforts to acquire data about the ventures' capabilities and its managers. They then apply actuarial models to decide whether to invest in the company or withdraw. Nonetheless, during these inspections investors also assess the company in regard to its ability to gain symbolic capabilities, which are representative signals, indicating the application of intuitive reasoning to evaluate the company. The results also indicate when there is a discrepancy between the two systems investors find it hard to ignore 'system 1'.