Twitter Buyout Secrets Found Out: The Psychological Trap That Even Genius Elon Musk Is Fooled By

In what’s now considered one of the most expensive mistakes in business history, Elon Musk’s Twitter (now X) buyout stands as a fascinating case study of how even the smartest people can make costly decisions. The $44 billion purchase price has turned out to be a massive overpayment, with Twitter’s value reportedly dropping by 80%. This decision not only affected Twitter but also dragged down Tesla’s stock price, leading to what Musk himself has admitted was a regrettable choice.

But how did someone as brilliant as Musk fall into this trap? Let’s explore the psychology behind this expensive decision.

Elon Musk Under the Microscope

In April 2022, Musk agreed to buy Twitter for $54.20 per share when the market price was around $38. This was overpriced in two ways – not only was the market price already too high for a company losing money year after year, but Musk willingly added a significant premium on top of that inflated price. It’s like paying extra for something that’s already overpriced.

Here are the five psychological tendencies that caught even a genius:

  1. Liking Tendency: Musk was already a Twitter superstar with 88 million followers at the time (now grown to 202 million in 2024). He loved the platform – his tweets could move markets and spark global conversations. When we like something, we tend to overvalue it wildly beyond its objective worth, like paying hundreds for a custom action figure of your own that’s objectively worth far less.
  2. Overconfidence Tendency: It’s human nature to think, “If I were running that business, I could do it better.” Musk had an impressive track record – PayPal, SpaceX, and turning Tesla into a global powerhouse. Twitter’s stock had reached $70 in 2021. Even “blockhead and idiots” managers could achieve that result, so why couldn’t he, with his proven success record, take it even higher? But some business models are fundamentally broken – no matter who’s in charge, they simply can’t be made profitable.
  3. Contrast-Misreaction Tendency: Musk’s reference point was Twitter’s previous high of $70 per share. Compared to that peak, his offer of $54.20 seemed like a bargain. The fundamental truth is that humans can only value things through comparison – without reference points, it’s impossible to determine the true value. However, using the wrong comparison point leads to misjudgments. That $70 price was likely inflated by market excitement rather than actual business fundamentals.
  4. Following the Social-Proof Tendency: We often trust market prices because they represent collective wisdom. It is ultimate social proof. Musk likely thought that since the market valued Twitter at $38 per share, paying a premium over that must be reasonable. But sometimes, the crowd gets it completely wrong. No matter how many people claim the Earth is flat, it simply isn’t.
  5. Consistency Tendency: Having already purchased 9% of Twitter’s shares when he announced the purchase, Musk might have felt committed to seeing it through. He wanted to transform Twitter, and partial ownership wouldn’t let him make the changes he envisioned. Once he started down this path, it became harder to change course.

The combination of these five psychological tendencies created a perfect storm that led to one of the most expensive business decisions in history. It’s a powerful reminder that no matter how successful or intelligent we are, we’re all susceptible to these mental traps.

Before making any important decision, it’s crucial to carefully examine which psychological tendencies are at play in your thinking process. These tendencies will inevitably influence your judgment, often leading to biased decisions if you’re not actively watching for them. Understanding and identifying these tendencies in your decision-making process is the first step to avoiding costly mistakes.

References
  1. Cialdini, Robert B. Influence: The Psychology of Persuasion. New York: Harper Business, 2006. ISBN: 978-0-06-124189-5.
  2. Isaacson, Walter. Elon Musk. New York: Simon & Schuster, 2023. ISBN: 978-1-4767-5010-4.