Investment decisions, NPV and bounded rationality

Carlo Alberto Magni

No 7419, Proyecciones Financieras y Valoración from Master Consultores

Abstract: The Net Present Value maximizing model has a respectable ancestry and is considered by most scholars 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 allegedly 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 papers shows that the hurdle-rate rule may be interpreted as a fruitful strategy of bounded rationality, where several important element are integrated and condensed into an aspiration level. This paper also addresses the issue of a fruitful cooperation between bounded and unbounded rationality, of which the heuristic NPV is one significant example.

Keywords: Finance; investment decisions; Net Present Value; bounded rationality; hurdle rate; heuristic; methodology (search for similar items in EconPapers)
JEL-codes: A11 A12 B41 C61 D46 D81 G11 G31 M21 (search for similar items in EconPapers)
Pages: 24
Date: 2010-09-12
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:007419

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