You’d think that if you offer billions of dollars to buy the typical CEO’s company, his eyes would instantly transform into cartoonish dollar signs.

Not so for Yahoo’s Jerry Yang, who repeatedly turned down buy-out offers from Microsoft.  Investor Carl Icahn criticized Yang’s decision as downright irrational.  We see his point, but we can also put ourselves in Yang’s shoes.

Last year, when Yahoo’s stock price was faring much better, Microsoft presented Yahoo with a buy-out offer for $40 per share. The Yahoo board turned down the offer, figuring that with Jerry Yang back on board (he had recently re-joined the company) Yahoo could get itself into a competitive position with Google without the help of Microsoft. Unfortunately, they were wrong, and the stock sank to a 5-year low, dipping into the $19 territory. As our mom would say, “You see, I told you so…”

But despite the stock price decline, Microsoft’s original $40 offer stayed alive and well in Yang’s mind as the figure he needed to reach in order to get back to even.

And so, when Microsoft shows up earlier this year with a $32 per share buyout offer, Yang couldn’t bring himself to accept. Psychologically, this new figure presented an $8 per share discount—or loss—compared with the $40 offer. This uneasy feeling in the pit of our stomach associated with a loss is difficult to ignore, even when objective data suggest it’s a fair price.

Even when Microsoft upped the offer to $33 a share, Yang didn’t budge.  A very reasonable offer, but a no-go for Yang.  Why?  For the same reason that house owners refuse to sell an investment property for a loss, even as prices continue to plummet.  And for the same reason that gamblers stay seated at a Vegas blackjack table, hoping to recoup their losses and get back close to even.

It might be easier said than done, but the Yahoo board needs to recognize that $40/share is a thing of the past. And when Icahn describes this situation as irrational, he’s hit it more on the bulls-eye that even he thought.