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 makersuse 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, thisimplies 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-specificand 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.

Investment decisions, net present value and bounded rationality / Magni, Carlo Alberto. - In: QUANTITATIVE FINANCE. - ISSN 1469-7688. - STAMPA. - 9:8(2009), pp. 967-979. [10.1080/14697680902849338]

Investment decisions, net present value and bounded rationality

MAGNI, Carlo Alberto
2009

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 makersuse 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, thisimplies 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-specificand 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.
2009
9
8
967
979
Investment decisions, net present value and bounded rationality / Magni, Carlo Alberto. - In: QUANTITATIVE FINANCE. - ISSN 1469-7688. - STAMPA. - 9:8(2009), pp. 967-979. [10.1080/14697680902849338]
Magni, Carlo Alberto
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/621255
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