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Investment decisions, equivalent risk and bounded rationality

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  • Magni, Carlo Alberto
Abstract
The Net Present Value maximizing model shows fallacies and inconsistencies that may be easily unmasked by performing a cognitive analysis of the decision-making process implied by the maximization problem. The model may be conveniently rescued if the maximizing version of the criterion is shunt aside and a boundedly rational interpretation is given. The resulting ‘mixed strategy’, currently in use by many real-life decision makers, opens up terrain to a fruitful cooperation between bounded and unbounded rationality. This paper is consistent with a fluid and nondichotomous interpretation of dual-process theories.

Suggested Citation

  • Magni, Carlo Alberto, 2007. "Investment decisions, equivalent risk and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6073
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    References listed on IDEAS

    as
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    2. Ortmann, Andreas & Gigerenzer, Gerd & Borges, Bernhard & Goldstein, Daniel G., 2008. "The Recognition Heuristic: A Fast and Frugal Way to Investment Choice?," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 107, pages 993-1003, Elsevier.
    3. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    4. Carlo Alberto Magni & Stefano Malagoli & Giovanni Mastroleo, 2006. "An Alternative Approach To Firms' Evaluation: Expert Systems And Fuzzy Logic," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 195-225.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Finance; Investment decisions; Net Present Value; heuristics; bounded rationality; cognition;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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