The Net Present Value maximizing model has a respectable ancestry and is considered by most scholars 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 allegedly correct opportunity cost of capital. According to a euristics-and-biases-program approach, this implies that the hurdle-rate rule is a biased heuristic. This papers shows that the hurdle-rate rule may be interpreted as a fruitful strategy of bounded rationality, where several important element are integrated and condensed into an aspiration level. This paper also addresses the issue of a fruitful cooperation between bounded and unbounded rationality, of which the heuristic NPV is one significant example.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
6073.
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 G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists D46 - Microeconomics - - Market Structure and Pricing - - - Value Theory A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
This paper has been announced in the following NEP Reports:
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.: