Investment decisions, equivalent risk and bounded rationality
AbstractThe Net Present Value maximizing model shows fallacies and inconsistencies that may be easily unmasked by performing a cognitive analysis of the decision-making process implied by the maximization problem. The model may be conveniently rescued if the maximizing version of the criterion is shunt aside and a boundedly rational interpretation is given. The resulting ‘mixed strategy’, currently in use by many real-life decision makers, opens up terrain to a fruitful cooperation between bounded and unbounded rationality. This paper is consistent with a fluid and nondichotomous interpretation of dual-process theories.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6073.
Date of creation: Aug 2007
Date of revision:
Finance; Investment decisions; Net Present Value; heuristics; bounded rationality; cognition;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
- M20 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - General
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-08 (All new papers)
- NEP-CBE-2007-12-08 (Cognitive & Behavioural Economics)
- NEP-UPT-2007-12-08 (Utility Models & Prospect Theory)
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