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Opportunity cost, excess profit, and counterfactual conditionals

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  • Magni, Carlo Alberto

Abstract

Counterfactual conditionals are cognitive tools that we incessantly use during our lives for judgments, evaluations, decisions. Counterfactuals are used for defining concepts as well; an instance of this is attested by the notions of opportunity cost and excess profit, two all-pervasive notions of economics: They are defined by undoing a given scenario and constructing a suitable counterfactual milieu. Focussing on the standard paradigm and Magni’s (2000, 2005, 2006) proposal this paper shows that the formal translation of the counterfactual state is not univocal and that Magni’s model retains formal properties of symmetry, additive coherence, homeomorphism, which correspond to properties of frame-independence, time invariance, completeness. Two introductory studies are also presented to illustrate how people cope with these counterfactuals and ascertain whether either model is seen as more “natural”. A brief discussion of the results obtained is also provided.

Suggested Citation

  • Magni, Carlo Alberto, 2003. "Opportunity cost, excess profit, and counterfactual conditionals," MPRA Paper 5695, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:5695
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    Cited by:

    1. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
    2. Carlo Alberto Magni, 2007. "A Sum&Discount Method for Appraising Firms: An Illustrative Example," Department of Economics 572, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    3. Magni, Carlo Alberto, 2010. "Residual income and value creation: An investigation into the lost-capital paradigm," European Journal of Operational Research, Elsevier, vol. 201(2), pages 505-519, March.

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    More about this item

    Keywords

    Opportunity cost; excess profit; residual income; counterfactual; modelling; frame-independence; time invariance; completeness;
    All these keywords.

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G00 - Financial Economics - - General - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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