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Reasoning the `Net-Present-Value´ Way: Some Biases and How to Use Psychology for Falsifying Decision Models

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  • Carlo Alberto Magni

Abstract

This paper analyzes the net-present-value (NPV) model, a keystone in economics: Behaviors and lines of reasoning of NPV-minded decision makers are observed and analyzed. As a result, one finds out that the NPV methodology is biased and its decision makers fall prey to various forms of fallacies and inconsistencies. The normative side of the NPV paradigm is therefore challenged by psychological arguments. While the power of psychology in falsifying models and theories from a descriptive point of view is already recognized, it may be the case that psychology will prove useful in normative falsification of optimization models as well.

Suggested Citation

  • Carlo Alberto Magni, 2010. "Reasoning the `Net-Present-Value´ Way: Some Biases and How to Use Psychology for Falsifying Decision Models," Proyecciones Financieras y Valoración 7420, Master Consultores.
    • Handle: RePEc:col:000463:007420
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    File URL: http://ssrn.com/abstract=1673371
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    Cited by:

    1. E. Volkova S. & V. Gisin B. & Е. Волкова С. & В. Гисин Б., 2014. "Меры Возможности И Внутренняя Норма Доходности Инвестиционных Проектов С Нечетко Определенными Платежами // A Possibilistic Approach To Calculating The Internal Rate Of Return For Investment Projects ," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, issue 3, pages 93-104.

    More about this item

    Keywords

    Decision making; optimization; Net Present Value; psychology; biases; falsification;
    All these keywords.

    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
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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