Question

From a behavioural finance perspective explain what role the ‘Winner’s Curse’ plays
in takeovers and initial public offerings of shares. Can behavioural finance shed light
on the likelihood of whether the government got a bad deal in the IPO of Royal Mail?

Answer 1

Winner's curse is tendency for a winning bid in an auction which exceeds the intrinsic value of the Asset.

this term is highly used in reference to initial public offer in which investors are often chasing for those companies and subscribing the shares of the company at really high amount which is relatively higher than the intrinsic value of share.

This is a type of behavioural tendency in which people often bid for initial public offer at a higher price than intrinsic value of the shares because there are asymmetric information lying in the economy as well as there are exuberance in buying at any given levels and these are emotion driven.

The government got a bad deal in royal Mall because it could have gotten more price which was the fair intrinsic value. it was too quick to sell it at a discounted price than its original intrinsic value and it costed 180 million pound loss to the government.