Investment decisions, net present value and bounded rationality

Magni, Carlo Alberto

doi:10.1080/14697680902849338

Cited by 40 publications

(32 citation statements)

References 99 publications

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“…Furthermore, normative assessment of the performance of real bank customers' decision processes (relative to the neoclassical benchmark) indicates heuristic strategies appear to serve investors reasonably well. Whereas the biases and heuristics literature frequently assigns an automatic negative normative value to any decision procedure that deviates from the neoclassical ideal, we identify attractive normative properties of the heuristic approach (similar to the normative assessments in Magni 2009). Similar lexicographic decision-tree heuristics such as Gigerenzer and Goldstein's (1996) take-the-best heuristic consider the features of investments sequentially in a ranking determined by some measure of pairwise correlation or univariate predictive accuracy (rather than considering all their intercorrelatedness with other regressors in the model as, for example, partial correlations do).…”

Section: Discussionmentioning

confidence: 99%

How do common investors behave? Information search and portfolio choice among bank customers and university students

et al. 2012

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Bank customers are not financial experts, and yet they make high-stakes decisions that can substantively affect personal wealth. Sooner or later, every individual has to take relevant investment decisions. Using data collected from financial advisors, bank customers and university students in Italy, this paper aims to reveal new insights about the decision processes of average non-expert investors: their investment goals, the information sets they consider, and the factors that ultimately influence decisions about investment products. Using four portfolio choice tasks based on data collected directly from financial advisors and their clients, we find that most subjects used a limited set of information, ignoring factors that conventional economic models usually assume drive investor behavior. Furthermore, we suggest that non-compensatory decision-tree models, which make no trade-offs among investment features, are parsimonious descriptions of investor

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Section: Discussionmentioning

confidence: 99%

How do common investors behave? Information search and portfolio choice among bank customers and university students

et al. 2012

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“…The Net Present Value (NPV) criterion has been formally conceived in [16], but its historical roots trace back to Fibonacci's present-value analysis in the 12th century and in the evaluation practices of properties, lands, buildings, shops in the commercial, banking, and legal communities since then (see [29]). It is considered a rational criterion for investment appraisal and decisions, and is increasingly employed in real-life applications.…”

Section: The Average Internal Rate Of Return (Airr)mentioning

confidence: 99%

Interval and fuzzy Average Internal Rate of Return for investment appraisal

Guerra¹,

Magni²,

Stefanini³

2014

Fuzzy Sets and Systems

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“…Risk is an important factor as well, but the practitioners' notion of risk is not equivalent to that of analytical models used in academia (see Magni 2009c).…”

Section: Insights For Future Research (Ii) : the Rate Of Return In A mentioning

confidence: 99%

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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Abstract. This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project's cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project's capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.

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Investment decisions, net present value and bounded rationality

Cited by 40 publications

References 99 publications

How do common investors behave? Information search and portfolio choice among bank customers and university students

How do common investors behave? Information search and portfolio choice among bank customers and university students

Interval and fuzzy Average Internal Rate of Return for investment appraisal

Capital depreciation and the underdetermination of rate of return: A unifying perspective

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