Under the purchase accounting method, an acquirer that pays more than the fair value for a target amortizes the difference over time on its income statement. In the 1990s, mergers between equally sized firms qualified for treatment as a pooling of interests, in which case no amortization was required. John McCormack, a senior vice president at the consulting firm Stern Stewart, is quoted as follows: The accounting model, in brief, says that the value of a company is its current earnings per share multiplied by a standard, industry-wide P/E ratio. . . . Take the case of Bernie Ebbers of WorldCom. I used to think he was brilliant until I heard him explain in a public forum why it was really important to have acquisitions created under the pooling-of-interests accounting method rather than the purchase method. These accounting effects have absolutely no effect on future cash flows, but they will definitely affect EPS. And if you had been persuaded by your investment bankers, as Bernie apparently was, that the value of MCI-WorldCom shares was your earnings per share multiplied by your industry P/E ratio, then you might have believed pooling accounting was important.Discuss John McCormack’s statements in the context of heuristics and biases, and relate the discussion to the market valuations of AOL and Time Warner.