Investment decisions,net present value and bounded rationality |
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Authors: | Carlo Alberto Magni |
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Institution: | 1. Department of Economics , University of Modena and Reggio Emilia , viale Berengario 51, 41100 Modena, Italy magni@unimo.it |
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Abstract: | The Net Present Value maximizing model has a respectable ancestry and is considered by most scholars to be 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 ‘correct’ opportunity cost of capital. According to a heuristics-and-biases-program approach, this implies that the hurdle-rate rule is a biased heuristic. This work shows that the hurdle-rate rule may be interpreted as a fruitful strategy of bounded rationality, where several domain-specific and project-specific elements are integrated and condensed into an aspiration level. The paper also addresses the issue of a productive cooperation between bounded and unbounded rationality. |
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Keywords: | Corporate finance Investments Bounded rationality Valuation Cognition and economics |
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