Munich Personal RePEc Archive

Investment decisions, net present value and bounded rationality

Magni, Carlo Alberto (2005): Investment decisions, net present value and bounded rationality.

WarningThere is a more recent version of this item available.
[img]
Preview
PDF
MPRA_paper_7451.pdf

Download (167Kb) | Preview

Abstract

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.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.