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Opportunity Cost, Excess Profit, and Counterfactual Conditionals

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Author Info
Carlo Alberto Magni () (University of Modena)

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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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Publisher Info
Article provided by Lille Graduate School of Management 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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Related research
Keywords: opportunity cost; excess profit; residual income; counterfactual modelling;

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Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
D40 - Microeconomics - - Market Structure and Pricing - - - General
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Andrew B. Abel, 1988. "Consumption and Investment," NBER Working Papers 2580, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Robert Sugden, 2000. "Credible worlds: the status of theoretical models in economics," Journal of Economic Methodology, Taylor and Francis Journals, vol. 7(1), pages 1-31, March. [Downloadable!] (restricted)
  3. Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Blackwell Publishing, vol. 55(2), pages 149-176, 04. [Downloadable!] (restricted)
  4. Carlo Magni, 2005. "On Decomposing Net Final Values: Eva, Sva and Shadow Project," Theory and Decision, Springer, vol. 59(1), pages 51-95, 08. [Downloadable!] (restricted)
    Other versions:
  5. magni, Carlo Alberto, 2006. "Zelig and the Art of Measuring Excess Profit," MPRA Paper 5663, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  6. 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. [Downloadable!] (restricted)
  7. Magni, Carlo Alberto, 2000. "Systemic Value Added, Residual Income and Decomposition of a Cash Flow Stream," MPRA Paper 5900, University Library of Munich, Germany. [Downloadable!]
  8. Tsiros, Michael & Mittal, Vikas, 2000. " Regret: A Model of Its Antecedents and Consequences in Consumer Decision Making," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 26(4), pages 401-17, March.
  9. 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. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. Magni, Carlo Alberto, 2004. "Modelling excess profit," Economic Modelling, Elsevier, vol. 21(3), pages 595-617, May. [Downloadable!] (restricted)
    Other versions:
  12. Loomes, Graham & Sugden, Robert, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 53(2), pages 271-82, April. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
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  14. Magni, Carlo Alberto, 2001. "Valore Aggiunto Sistemico: un'alternativa all'EVA quale indice di sovraprofitto periodale," MPRA Paper 7525, University Library of Munich, Germany. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlo Alberto, Magni, 2008. "Splitting Up Value: A Critical Review of Residual Income Theories," MPRA Paper 10506, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Magni, Carlo Alberto, 2007. "Residual income and value creation: An investigation into the lost-capital paradigm," MPRA Paper 7335, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Magni, Carlo Alberto, 2007. "A Sum&Discount method for appraising firms:An illustrative example," MPRA Paper 6114, University Library of Munich, Germany. [Downloadable!]
    Other versions:
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