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Investment decisions, equivalent risk and bounded rationality

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  • Magni, Carlo Alberto

Abstract

The 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6073.

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Date of creation: Aug 2007
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Handle: RePEc:pra:mprapa:6073

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Keywords: Finance; Investment decisions; Net Present Value; heuristics; bounded rationality; cognition;

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References

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  1. Andrew B. Abel, 1988. "Consumption and Investment," NBER Working Papers 2580, National Bureau of Economic Research, Inc.
  2. Magni, Carlo Alberto, 2004. "An alternative approach to firms’ evaluation: expert systems and fuzzy logic," MPRA Paper 7879, University Library of Munich, Germany.
  3. Ortmann, Andreas & Gigerenzer, Gerd & Borges, Bernhard & Goldstein, Daniel G., 2008. "The Recognition Heuristic: A Fast and Frugal Way to Investment Choice?," Handbook of Experimental Economics Results, Elsevier.
  4. Ravi Jagannathan & Iwan Meier, 2002. "Do We Need CAPM for Capital Budgeting?," NBER Working Papers 8719, National Bureau of Economic Research, Inc.
  5. Carlo Alberto Magni & Giovanni Mastroleo & Marina Vignola & Gisella Facchinetti, 2009. "Strategic options and expert systems: a fruitful marriage," PROYECCIONES FINANCIERAS Y VALORACION 006122, MASTER CONSULTORES.
  6. Lawrence H. Summers, 1986. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Working Papers 1941, National Bureau of Economic Research, Inc.
  7. 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.
  8. Magni, C. A. & Mastroleo G. & Facchinetti, G., 2001. "A Fuzzy expert system for solving ReaL-Option decision processes," Fuzzy Economic Review, International Association for Fuzzy-set Management and Economy (SIGEF), vol. 0(2), pages 51-73, November.
  9. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  10. John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 8-23.
  11. Gigerenzer, Gerd & Todd, Peter M. & ABC Research Group,, 2000. "Simple Heuristics That Make Us Smart," OUP Catalogue, Oxford University Press, number 9780195143812, September.
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