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

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 persist even in a Bayesian setting, and suggest several approaches to mitigate the effect.