Dealing with the ''psychological due-dilligence'', through behavioral game theory ,it is necessary to adopt a combination of psychological/sociological parametres with financial assumptions, for forecasting modelling in Funds, Private Equities,VC's .
Ι managed to combine some result-oriented assumptions for high -reliability forecasting ratios according to the modern risk factor's analysis for investments ' decisions .
The ''testing scenarios '' through mathematical economics and simulation, are based on the question
'' how to involve in a proposal structure for a deal, during due dilligence period, Exit Strategy Ratios with Projections and Valuation of current estimation ,in order to have more reliable and non-stochastic results from human decisions or non-financial criteria ''
In simple words:
''how to minimize the human feeling’s criteria according to the investment criteria ''
Τhe forecasting ( interactive ) model is based on some emotional and intelligence decision parameters like:
- Pessimism/ Optimism
- Cooperation bias
and on some finacial parameters ,like :
- Base case IRR & cash flows
- Variation IRR & cash flows
So, either a Prιvate Equity , a Fund , a VC, or an individual investor , during due dillingence and decision period ,they need to adopt the interaction of human and financial assumptions for the projections and the expected figures like : ( tested from algorithm's time series for projects < 100 millions )
- Entry value for PE (deal total/EBITDA )
- Entry value for PE (based on Yr 1-5 EBITDA)
- Entry Fund risk to last 12m EBITDA
- Exit PE (base case Yr 3 EBITDA)
- VC multiple of investment on exit
- Net debt projections( pre-deal )
After the above, the valuation model can show to us the effect of human’s mistakes in changing the financial variables on the exit value and IRR .
Talent, experience, and tendency for non-rational or rational investment decisions are not following the traditional decision makinf or risk management assumptions, especially nowadays , where the financial crisis remind us the neccessity of research and development in behavioral finance and economic psychology.
Director of Upgrade London Partners