Zelig and the Art of Measuring Excess Profit
This paper tells the story of a student of economics and finance who meets a couple of alleged psychopaths, suffering from the ‘syndrome of Zelig’, so that they think of themselves to be experts of economic and financial issues. While speaking, they come across the concept of excess profit. The student tells them that the formal way to translate excess profit is to apply Stewart’s (1991) EVA model and shows that this model is equivalent to Peccati’s (1987, 1991, 1992) decomposition model of a project’s Net Present (Final) Value. The ‘Zeligs’ listen to him carefully, then try to apply themselves the EVA model: Unfortunately, both She-Zelig and He-Zelig seem to feel uneasy with basic mathematics, so they make some mistakes. Consequently, each of them miscalculates the excess profit. Strangely enough, they make different mistakes but both get to the (correct) Net Final Value of the project and, in addition, their excess profits do coincide. Further, the (biased) models presented by the Zeligs, though different from the EVA model, seem to bear strong relations to the latter. The student is rather surprised. I give my version of this event, arguing that the Zeligs are offering us a rational way of measuring excess profit, alternative to the standard one (EVA) but equally valuable. As I see it, they are only adopting a different cognitive interpretation of the concept of excess profit, which is based on a counterfactual conditional that differs from Stewart’s and Peccati’s.
(This abstract was borrowed from another version of this item.)
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.:
- Magni, Carlo Alberto, 2005. "On decomposing net final values: EVA, SVA, and shadow project," MPRA Paper 12357, University Library of Munich, Germany.
- Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "An Analysis of Criteria for Investment and Financing Decisions Under Certainty," Management Science, INFORMS, vol. 12(3), pages 151-179, November.
- P. H. Karmel, 1959. "The Marginal Efficiency Of Capital," The Economic Record, The Economic Society of Australia, vol. 35(72), pages 429-434, December.
- Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, 04.
- Flavio Pressacco & Patrizia Stucchi, 1997. "Su Una Estensione Bidimensionale del Teorema di Scomposizione di Peccati," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 20(2), pages 169-185, September.
- Carlo Alberto Magni, 2009.
"Modeling excess profit,"
PROYECCIONES FINANCIERAS Y VALORACION
005522, MASTER CONSULTORES.
- Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "Mathematical Analysis of Rates of Return Under Certainty," Management Science, INFORMS, vol. 11(3), pages 395-403, January.
- Carlo Magni, 2005. "On Decomposing Net Final Values: Eva, Sva and Shadow Project," Theory and Decision, Springer, vol. 59(1), pages 51-95, 08.
When requesting a correction, please mention this item's handle: RePEc:ffe:journl:v:3:y:2006:i:1:p:103-129. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sophie Bodo)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.