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SPRING 2005 |
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 A
new book authored by Henry C. Lucas, Jr., Robert H. Smith Professor of
Information Systems, and G. Anandalingam, Ralph J. Tyser Professor of
Management Science and chair of the decision and information technologies
department, offers guidance on how firms can avoid the kind of corporate
“victories” that end up as disasters. Beware the Winner’s Curse:
Victories That Can Sink You and Your Company (Oxford University Press,
2004) expands the model of the “Winner’s Curse” to explain how companies
like Tyco, MCI-WorldCom and Lucent overpaid for acquisitions, and how
shareholders suffered as a result.
The winner’s curse comes when a company is focused on winning at all costs, sometimes at such a cost that the company becomes unprofitable and is no longer able to compete. “We saw just that situation with the telecom industry in Europe a few years ago,” Anandalingam explains. “European telecom companies bid so fiercely for the right to provide wireless service that they were left without enough money to actually build the network.”
Companies aren’t the only ones who get into the situation of paying more than something is worth and then suffering for it. Lucas cites a further example from Hollywood. “A director-producer named Michael Cimino produced the Academy-Award winning film, ‘The Deer Hunter.’ United Artists was so impressed by the director’s work that they overpaid for his next film, Heaven’s Gate, which was an unmitigated disaster at the box office,” says Lucas. “Eventually the parent of United Artists was forced to close the studio.” So is there a way to avoid the winner’s curse? Anandalingam and Lucas suggest learning to walk away from an opportunity when it seems dicey, and wait for the next one. “Business isn’t like a game of football, when you’re out on the field for an hour and that is the only chance you have to compete,” says Lucas. “There is always another opportunity. Sometimes it is best to walk away.” But that isn’t always easy to do, especially in the heat of battle. An independent board, or an outside advisor, can help to provide the objective view necessary to throw cold water on the unbridled excitement that can lead to poor decision-making. In the book, Anandalingam and Lucas detail cultural, personality, and psychological factors and market-based mechanisms that contribute to the curse. Their advice ranges from curbing the imperial CEO to adopting a systems approach for decision making and using game theory. |
The
term “Winner’s Curse” was first coined by economists to explain how in
auctions, the winning bidder is usually the most optimistic about the value
of an item being auctioned and therefore often bids more – sometimes much
more – than the item is worth. In this new book, Anandalingam and Lucas
explain how such activity in the corporate world – whether it’s overpaying
for another company, overbidding for new technology, or hiring the wrong
“superstar” CEO – can lead to disaster. 
SMITH BUSINESS
Copyright 2005 Robert H. Smith School of Business