Why New Venture Investors Overvalue Some Investment Proposals and Undervalue Others: Experimental Evidence

New venture investment decisions reflect misvaluations, as many deserving proposals are rejected at the initial screening phase, whereas most invested proposals fail to provide the required financial returns. This point suggests that investors overvalue and undervalue investment proposals. We use the arguments of dual process theory and salience theory to explain the cause of misvaluations by nonprofessional investors. In an experimental setup, the treated group is given time pressure to make the investment. Results show that investors under time pressure overvalue investment proposals, whereas reference-based comparison of salient information signals results in undervaluation. Results further show a significant impact of time pressure on the reference for the comparison of proposals. Investors under time pressure consider recent proposal as a reference; in contrast, they consider information from multiple previous proposals in the absence of time pressure. This study provides the specific source of misvaluations as per the context of overvaluation and undervaluation of new venture investment proposals.