Investment decisions, net present value and bounded rationality
AbstractThe Net Present Value maximizing model has a respectable ancestry and is considered by most scholars to be a theoretically sound decision model. In real-life applications, decision makers use the NPV rule, but apply a subjectively determined hurdle rate, as opposed to the 'correct' opportunity cost of capital. According to a heuristics-and-biases-program approach, this implies that the hurdle-rate rule is a biased heuristic. This work shows that the hurdle-rate rule may be interpreted as a fruitful strategy of bounded rationality, where several domain-specific and project-specific elements are integrated and condensed into an aspiration level. The paper also addresses the issue of a productive cooperation between bounded and unbounded rationality.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Quantitative Finance.
Volume (Year): 9 (2009)
Issue (Month): 8 ()
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Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=111405
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