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The Valuator’s Curse: Decision Analysis of Overvaluation and Disappointment in Acquisition

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  • Onesun Steve Yoo

    (UCL School of Management, University College London, London E14 5AB, United Kingdom)

  • Kevin McCardle

    (UCLA Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095)

Abstract

Initial valuations of entrepreneurial ventures offering uncertain payoffs can often be overvalued by investors; namely, the expected payoff postacquisition is smaller than the expected payoff prior to acquisition when the investor harbors uncertainties about various components of the business. Common explanations involve irrationality such as psychological preference for potential over realized payoffs. We provide a different, rational explanation, which we term the valuator’s curse. It is similar in nature to the winner’s curse in auctions and the optimizer’s curse in decision analysis, but the source of the curse is neither from the competitive effects of an auction-type mechanism nor from the optimization effects in a choice among alternatives. Rather the effect is generated from the nonlinear evaluation of the payoffs, even though the inputs to the evaluation are unbiased. We formalize the valuator’s curse and discuss its implications to entrepreneur’s learning. The valuator’s curse proves a boon to the entrepreneur as it leads to larger capitalizations.

Suggested Citation

  • Onesun Steve Yoo & Kevin McCardle, 2020. "The Valuator’s Curse: Decision Analysis of Overvaluation and Disappointment in Acquisition," Decision Analysis, INFORMS, vol. 17(4), pages 299-313, December.
    • Handle: RePEc:inm:ordeca:v:17:y:4:i:2020:p:299-313
    DOI: 10.1287/deca.2020.0414
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    References listed on IDEAS

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    Cited by:

    1. Yeu-Shiang Huang & Min-Sheng Yang & Jyh-Wen Ho, 2022. "Bundling Decisions for Selling Multiple Items in Online Auctions," Decision Analysis, INFORMS, vol. 19(1), pages 44-62, March.

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