The Valuator's Curse or the Entrepreneur's Boon: Decision Analysis of Post-IPO-Launch Disappointment

22 Pages Posted: 27 Feb 2018

See all articles by Onesun Steve Yoo

Onesun Steve Yoo

UCL School of Management, University College London

Kevin F. McCardle

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

Date Written: February 15, 2018

Abstract

Evidence from IPOs show that the initial valuations of entrepreneurial ventures tend to be overvalued (Fisher 2014). One common explanation is irrationality on the part of the entrepreneur characterized by overconfidence (Galasso and Simcoe 2011). 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 (Thaler 1988) and the optimizer's curse in decision analysis (Smith and Winkler 2006), 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 in the evaluation itself, even though the inputs to the evaluation are unbiased. We provide general conditions which result in the valuator's curse, show that they weakly persist in a Bayesian setting, and suggest several approaches to mitigate the effect.

Suggested Citation

Yoo, Onesun Steve and McCardle, Kevin F., The Valuator's Curse or the Entrepreneur's Boon: Decision Analysis of Post-IPO-Launch Disappointment (February 15, 2018). Available at SSRN: https://ssrn.com/abstract=3124824 or http://dx.doi.org/10.2139/ssrn.3124824

Onesun Steve Yoo (Contact Author)

UCL School of Management, University College London ( email )

1 Canada Square
London, E14 5AB
United Kingdom

Kevin F. McCardle

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

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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