Darryl Laws

 Abstract. Past studies have focused on valuation and utility of the merger and acquisition motives while only a few game theory studies focus on irrational human behavior during a strategic merger or acquisition transaction and the impacts that the behavior has had on the decision-making process. Most of the research written is on the analysis of Nash equilibrium under the complete information static game. This comprehensive literature review aims to discuss and analyze the irrational human behavioral decision-making in the merger and acquisition context within the framework of incomplete information strategic dominance game and payoff combined with a brief discussion of rationality and bounded rationality decision-making (normative decision theory) while exploring the literature written on what causes or  precipitates irrational human behavior. Known as zero sum games or non-cooperative game, a game in which the players’ interest are in conflict and in which there is a payoff of a zero sum to one player (Crawford, 2001).

Introduction.

Types of decision-making. While conducting research in preparation for writing this comprehensive literature review paper it was discovered that very few researchers have considered conscious and subconscious processes of decision-making. I discovered an article written by Cyert and March (1963) that demonstrated in case studies that goals of individuals may vary across people and time. Simon’s (1965) model of identification, development and selection in decision-making was a simplified version of rational model. This research gave birth to two extremes: rationality and bounded rationality. Bounded rationality is defined as when individuals make decisions their rationality is limited by the tractability of the problem and the cognitive limitations of their mind.  Eisenhardt and Zbaracki (1992) probed further into political, power and garbage can model (Cohen , 1972) for decision-making, but factors such as greed, fear and overconfidence were not considered in their research. This cognitive behavior factor gives rise to irrational behavior, a third continuum of behavioral extremes to be examined. A rationalizable strategy is one for which there is some profile of others’ strategies… equilibrium and rationalizability; a unique equilibrium without dominance that makes it a best response. A rationalizable strategy is then one that is rationalizable for all (Berheim, 2004).

Normative decision theory states and is concerned with identifying the best decision to make, assuming an ideal decision-maker who is fully informed, is able to compute with perfect accuracy, and is fully rational. When the information is not complete, the decision-maker makes the best decision given the sub set of information available and thus shows ‘bounded rationality’. 

Darryl Laws