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

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. Commo...

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Bibliographic Details
Published in:Decision analysis 2020-12, Vol.17 (4), p.299-313
Main Authors: Yoo, Onesun Steve, McCardle, Kevin
Format: Article
Language:English
Subjects:
Auctions
Businesspeople
Decision analysis
Decision making
disappointment
entrepreneurial overvaluation
Entrepreneurship
Investors
Nonlinear systems
Payoffs
valuator’s curse
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Summary: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.
ISSN:1545-8490
1545-8504
DOI:10.1287/deca.2020.0414