Date Added: Feb 2011
One of the foundations of behavioral finance is the overconfidence hypothesis. Barberis and Thaler (2003) list it as one of the main beliefs that characterize study in the field. Simply put, the overconfidence hypothesis suggests that the subjects of study (investors or corporate managers) believe that they are more competent or better able to achieve above-average results. Interestingly, the authors know that half of any group is below-median, yet when asked about general items such as driving ability or income prospects, 90% of a given group believe themselves to be above average. The purpose in this paper is to examine the literature on overconfidence as it relates to mergers and acquisitions (M&A) with a specific focus on measuring the effect of overconfidence in mergers.