Reasoning the `Net-Present-Value´ Way: Some Biases and How to Use Psychology for Falsifying Decision Models

Carlo Alberto Magni

No 7420, Proyecciones Financieras y Valoración from Master Consultores

Abstract: This paper analyzes the net-present-value (NPV) model, a keystone in economics: Behaviors and lines of reasoning of NPV-minded decision makers are observed and analyzed. As a result, one finds out that the NPV methodology is biased and its decision makers fall prey to various forms of fallacies and inconsistencies. The normative side of the NPV paradigm is therefore challenged by psychological arguments. While the power of psychology in falsifying models and theories from a descriptive point of view is already recognized, it may be the case that psychology will prove useful in normative falsification of optimization models as well.

Keywords: Decision making; optimization; Net Present Value; psychology; biases; falsification (search for similar items in EconPapers)
JEL-codes: A12 B41 G11 G12 G31 (search for similar items in EconPapers)
Pages: 61
Date: 2010-09-12
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:007420

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