Investment decisions, equivalent risk and bounded rationality

Magni, Carlo Alberto (2007): Investment decisions, equivalent risk and bounded rationality.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Finance, Investment decisions, Net Present Value, heuristics, bounded rationality, cognition
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B40 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; A - General Economics and Teaching > A1 - General Economics > A12 - Relation of Economics to Other Disciplines; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M20 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General

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