Study On The Effect Of Irrationality On M&A Decision-making

With the development of economics, the hypothesis of "rational man" of the traditional economics is widely criticized, and the classical theory for risk decision behaviors under the uncertainty--Expected Utility Theory (EUT) is also questioned because it is difficult to explain and predict many special phenomenon. In1950s, Herbert Simon proposed the concept of "bounded rationality", opens the door to behavioral economics. In1979, Kahneman and Tversky proposed the Prospect Theory, a new amendment to the EUT, which put the behavioral economics on the economics mainstream stage also accelerating its pace of development. However, on the contrast to finance, legal and other fields, very less research in terms of behavioral economics was done in the Merge and Acquisition (M&A) in terms. This article attempts to propose a hypothesis through the analysis of a real case that the presence of irrationality of decision makers during M&A, and then based on the tests to a large number of respondents to verify the hypothesis, and applying prospect theory reveals the impact of irrational decision-making behavior for merger and acquisition. This article also propose a hypothesis of the concept of rational decision-making function, simultaneously function shape and mathematical expression are given. Finally, the summary of the article and the relevant suggestion about how to prevent and mitigate the risk of irrationality as well as the problems to be studied in the future is given.