Zelig and the Art of Measuring Excess Profit

magni, Carlo Alberto (2006): Zelig and the Art of Measuring Excess Profit. Published in: Frontiers in Finance and Economics , Vol. 1, No. 3 (June 2006): pp. 103-129.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Excess profit, residual income, economic value dded, net final value, systemic value added, counterfactual
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; C - Mathematical and Quantitative Methods > C0 - General; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing; G - Financial Economics > G0 - General > G00 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D46 - Value Theory; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B40 - General; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; 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

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