IDEAS home Printed from https://ideas.repec.org/a/taf/quantf/v9y2009i8p967-979.html
   My bibliography  Save this article

Investment decisions, net present value and bounded rationality

Author

Listed:
  • Carlo Alberto Magni

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.

Suggested Citation

  • Carlo Alberto Magni, 2009. "Investment decisions, net present value and bounded rationality," Quantitative Finance, Taylor & Francis Journals, vol. 9(8), pages 967-979.
    • Handle: RePEc:taf:quantf:v:9:y:2009:i:8:p:967-979
    DOI: 10.1080/14697680902849338
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680902849338
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/14697680902849338?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ekern, Steinar, 2006. "A Dozen Consistent CAPM-Related Valuation Models - So Why Use the Incorrect One?," Discussion Papers 2006/6, Norwegian School of Economics, Department of Business and Management Science, revised 25 Apr 2007.
    2. Goetzmann, William N. & Rouwenhorst, K. Geert (ed.), 2005. "The Origins of Value: The Financial Innovations that Created Modern Capital Markets," OUP Catalogue, Oxford University Press, number 9780195175714.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carlo Alberto Magni, 2023. "The Split-Screen Approach for Project Appraisal (Part I: The Theory)," JRFM, MDPI, vol. 16(3), pages 1-49, March.
    2. Marco Monti & Riccardo Boero & Nathan Berg & Gerd Gigerenzer & Laura Martignon, 2012. "How do common investors behave? Information search and portfolio choice among bank customers and university students," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 11(2), pages 203-233, December.
    3. Weber, Thomas A., 2014. "On the (non-)equivalence of IRR and NPV," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 25-39.
    4. Carlo Alberto Magni, 2010. "Average Internal Rate of Return and investment decisions: A new perspective," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    5. E. M. Cervellati & P. Pattitoni & M. Savioli, 2016. "Cognitive Biases and Entrepreneurial Under-Diversification," Working Papers wp1076, Dipartimento Scienze Economiche, Universita' di Bologna.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
    2. Tamer Khraisha & Keren Arthur, 2018. "Can we have a general theory of financial innovation processes? A conceptual review," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-27, December.
    3. Lin, Chen & Ma, Chicheng & Sun, Yuchen & Xu, Yuchen, 2021. "The telegraph and modern banking development, 1881–1936," Journal of Financial Economics, Elsevier, vol. 141(2), pages 730-749.
    4. William Kingston, 2014. "Schumpeter and the end of Western Capitalism," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 449-477, July.
    5. Magni, Carlo Alberto, 2007. "CAPM and capital budgeting: present versus future, equilibrium versus disequilibrium, decision versus valuation," MPRA Paper 5468, University Library of Munich, Germany.
    6. Bonnie G. Buchanan, 2016. "Securitization: A Financing Vehicle for All Seasons?," Journal of Business Ethics, Springer, vol. 138(3), pages 559-577, October.
    7. Laeven, Luc & Levine, Ross & Michalopoulos, Stelios, 2015. "Financial innovation and endogenous growth," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 1-24.
    8. Eric Tymoigne, 2014. "Monetary Mechanics: A Financial View," Economics Working Paper Archive wp_799, Levy Economics Institute.
    9. Darriet, Elisa & Guille, Marianne & Vergnaud, Jean-Christophe & Shimizu, Mariko, 2020. "Money illusion, financial literacy and numeracy: Experimental evidence," Journal of Economic Psychology, Elsevier, vol. 76(C).
    10. Gaël Giraud & Myrna Wooders, 2012. "On the Simultaneous Emergence of Money and the State," Documents de travail du Centre d'Economie de la Sorbonne 12094, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    11. Jon Frost & Hyun Song Shin & Peter Wierts, 2020. "An early stablecoin? The Bank of Amsterdam and the governance of money," BIS Working Papers 902, Bank for International Settlements.
    12. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
    13. Elaine Hutson, 2012. "The Evolution of the Managed Funds Industry: Investment Trusts in Nineteenth-century Britain," Chapters, in: Geoffrey Poitras (ed.), Handbook of Research on Stock Market Globalization, chapter 5, Edward Elgar Publishing.
    14. Robert J. Shiller, 2014. "Speculative Asset Prices," American Economic Review, American Economic Association, vol. 104(6), pages 1486-1517, June.
    15. Sitabhra Sinha & Raj Kumar Pan, 2007. "Uncovering the Internal Structure of the Indian Financial Market: Cross-correlation behavior in the NSE," Papers 0704.2115, arXiv.org.
    16. Magni, Carlo Alberto, 2009. "Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?," European Journal of Operational Research, Elsevier, vol. 192(2), pages 549-560, January.
    17. Ordoñez, Guillermo, 2018. "Confidence banking and strategic default," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 101-113.
    18. Murinde, Victor & Rizopoulos, Efthymios & Zachariadis, Markos, 2022. "The impact of the FinTech revolution on the future of banking: Opportunities and risks," International Review of Financial Analysis, Elsevier, vol. 81(C).
    19. Osama S. Tayyeb & Isam Yahia Al-Filali & Giulio M. Gallarotti, 2015. "A Blueprint for a Knowledge Bourse, a Financial Innovation for an Information Age," American Journal of Economics and Business Administration, Science Publications, vol. 7(4), pages 139-159, November.
    20. Anthony Tchékémian, 2015. "Le rôle de la théorie monétariste, la Fédérale Réserve, le système des garanties internationales de droit privé et leurs incidences sur le développement durable des territoires," Post-Print hal-01684960, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:9:y:2009:i:8:p:967-979. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RQUF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.