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Opportunity Cost, Excess Profit, and Counterfactual Conditionals

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  • Carlo Alberto Magni

    ()
    (University of Modena)

Abstract

Counterfactual conditionals are cognitive tools that we incessantly use during our lives for judgments, evaluations, decisions. Counterfactuals are used for defining concepts as well; an instance of this is attested by the notions of opportunity cost and excess profit (residual income), two all-pervasive notions of economics: They are defined by undoing a given scenario and constructing a suitable counterfactual milieu. Focussing on the standard paradigm and Magni's (2000, 2005, 2009a,b) proposal this paper shows that the formal translation of the counterfactual state is not univocal and that Magni's model retains formal properties of symmetry, additive coherence, homeomorphism, which correspond to properties of frame-independence, time invariance, completeness. Two introductory studies are also presented to illustrate how people cope with these counterfactuals and ascertain whether either model is seen as more "natural". A brief discussion of the results obtained is also provided.

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Bibliographic Info

Article provided by SKEMA Business School in its journal Frontiers in Finance and Economics.

Volume (Year): 6 (2009)
Issue (Month): 1 (April)
Pages: 118-154

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Handle: RePEc:ffe:journl:v:6:y:2009:i:1:p:118-154

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Web page: http://www.ffe.esc-lille.com

Related research

Keywords: opportunity cost; excess profit; residual income; counterfactual modelling;

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References

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  1. Andrew B. Abel, 1988. "Consumption and Investment," NBER Working Papers 2580, National Bureau of Economic Research, Inc.
  2. Tsiros, Michael & Mittal, Vikas, 2000. " Regret: A Model of Its Antecedents and Consequences in Consumer Decision Making," Journal of Consumer Research, University of Chicago Press, vol. 26(4), pages 401-17, March.
  3. magni, Carlo Alberto, 2006. "Zelig and the Art of Measuring Excess Profit," MPRA Paper 5663, University Library of Munich, Germany.
  4. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
  5. Magni, Carlo Alberto, 2004. "Modelling excess profit," Economic Modelling, Elsevier, vol. 21(3), pages 595-617, May.
  6. Carlo Magni, 2005. "On Decomposing Net Final Values: Eva, Sva and Shadow Project," Theory and Decision, Springer, vol. 59(1), pages 51-95, 08.
  7. Roberto Ghiselli Ricci & Carlo Alberto Magni, 2006. "Economic value added and systemic value added: symmetry, additive coherence and differences in performance," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(3), pages 151-154, May.
  8. Magni, Carlo Alberto, 2000. "Scomposizione di sovraprofitti: Economic Value Added e Valore Aggiunto Sistemico
    [Excess-profit decomposition: Economic Value Added and Systemic Value Added]
    ," MPRA Paper 8935, University Library of Munich, Germany.
  9. Loomes, Graham & Sugden, Robert, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 271-82, April.
  10. Magni, Carlo Alberto, 2001. "Valore Aggiunto Sistemico: un'alternativa all'EVA quale indice di sovraprofitto periodale," MPRA Paper 7525, University Library of Munich, Germany.
  11. Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, 04.
  12. Magni, Carlo Alberto, 2000. "Systemic Value Added, Residual Income and Decomposition of a Cash Flow Stream," MPRA Paper 5900, University Library of Munich, Germany.
  13. Magni, Carlo Alberto, 2005. "On decomposing net final values: EVA, SVA, and shadow project," MPRA Paper 12357, University Library of Munich, Germany.
  14. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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Cited by:
  1. Carlo Alberto Magni, 2007. "A Sum&Discount Method for Appraising Firms: An Illustrative Example," Department of Economics 0572, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
  2. Magni, Carlo Alberto, 2010. "Residual income and value creation: An investigation into the lost-capital paradigm," European Journal of Operational Research, Elsevier, vol. 201(2), pages 505-519, March.
  3. Carlo Alberto, Magni, 2008. "Splitting Up Value: A Critical Review of Residual Income Theories," MPRA Paper 10506, University Library of Munich, Germany.

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