Zelig and the Art of Measuring Excess Profit
AbstractThis paper tells the story of a student of economics and finance who meets a couple of alleged psychopaths, suffering from the âsyndrome of Zeligâ, so that they think of themselves to be experts of economic and financial issues. While speaking, they come across the concept of excess profit. The student tells them that the formal way to translate excess profit is to apply Stewartâs (1991) EVA model and shows that this model is equivalent to Peccatiâs (1987, 1991, 1992) decomposition model of a projectâs Net Present (Final) Value. The âZeligsâ listen to him carefully, then try to apply themselves the EVA model: Unfortunately, both She-Zelig and He-Zelig seem to feel uneasy with basic mathematics, so they make some mistakes. Consequently, each of them miscalculates the excess profit. Strangely enough, they make different mistakes but both get to the (correct) Net Final Value of the project and, in addition, their excess profits do coincide. Further, the (biased) models presented by the Zeligs, though different from the EVA model, seem to bear strong relations to the latter. The student is rather surprised. I give my version of this event, arguing that the Zeligs are offering us a rational way of measuring excess profit, alternative to the standard one (EVA) but equally valuable. As I see it, they are only adopting a different cognitive interpretation of the concept of excess profit, which is based on a counterfactual conditional that differs from Stewartâs and Peccatiâs.
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Bibliographic InfoArticle provided by SKEMA Business School in its journal Frontiers in Finance and Economics.
Volume (Year): 3 (2006)
Issue (Month): 1 (June)
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Web page: http://www.ffe.esc-lille.com
Excess profit; economic value added; net final value; systemic value added; counterfactual;
Other versions of this item:
- G00 - Financial Economics - - General - - - General
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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