Chisini means and rational decision making: Equivalence of investment criteria

Magni, Carlo Alberto and Veronese, Piero and Graziani, Rebecca (2017): Chisini means and rational decision making: Equivalence of investment criteria. Forthcoming in: Mathematics and Financial Economics

Abstract

A plethora of tools are used for investment decisions and performance measurement, including Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Modified Internal Rate of Return (MIRR), Average Accounting Rate of Return (AARR). All these and other known metrics are generally considered non-equivalent and some of them are regarded as unreliable or even naive. Building upon Magni (2010a, 2013)'s Average Internal Rate of Return (AIRR), we show that the notion of Chisini mean enables these tools to be used as rational decision criteria. Specifically, we focus on 11 metrics and show that, if properly used, they all provide equivalent accept-reject decisions and equivalent project rankings. Therefore, the intuitive notion of mean is the founding basis of investment decision criteria.

• Item Type: MPRA Paper
• Language: English
• Keywords: Value creation, accept-reject decisions, project ranking, equivalence class, Net Present Value, Average Internal Rate of Return
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G3 - Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting

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