Cognitive Biases in the Capital Investment Context: by Sebastian Serfas

By Sebastian Serfas

In today’s aggressive enterprise atmosphere, an optimum funding process is key for each corporation. even if, it's always endangered by way of subconscious psychological biases inherent in each individual. construction on findings from cognitive psychology study, Sebastian Serfas exhibits intimately that and the way those so-called cognitive biases systematically impact and warp capital investment-related choice making and enterprise decisions. He presents loads of examples that each enterprise practitioner may possibly stumble upon on a daily basis, demonstrates the unsafe results via a number of empirical experiments, and descriptions capability counterstrategies to mitigate those detrimental effects.

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By Sebastian Serfas

In today’s aggressive enterprise atmosphere, an optimum funding process is key for each corporation. even if, it's always endangered by way of subconscious psychological biases inherent in each individual. construction on findings from cognitive psychology study, Sebastian Serfas exhibits intimately that and the way those so-called cognitive biases systematically impact and warp capital investment-related choice making and enterprise decisions. He presents loads of examples that each enterprise practitioner may possibly stumble upon on a daily basis, demonstrates the unsafe results via a number of empirical experiments, and descriptions capability counterstrategies to mitigate those detrimental effects.

Show description

Read or Download Cognitive Biases in the Capital Investment Context: Theoretical Considerations and Empirical Experiments on Violations of Normative Rationality PDF

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Extra info for Cognitive Biases in the Capital Investment Context: Theoretical Considerations and Empirical Experiments on Violations of Normative Rationality

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The subsequent sections focus on three basic heuristics – availability, representativeness, and anchoring – and describe in detail the cognitive biases that directly result from the use of each heuristic. 1 Introduction to the 'Heuristics and Biases' Approach The 'heuristics and biases' approach is based on research in the field of cognitive biases pioneered in the 1970s and 1980s145 by Daniel Kahneman and Amos Tversky, who "developed theoretical approaches […] to understand the limi- 144 145 Both with regard to shifts in detailed content focus but also in linguistic terms: For example, the sub-discipline that is today called 'computational cognitive science' has earlier been referred to as 'cognitive science' by many authors.

The focus of this sub-chapter is on static methods, which are usually considerably simpler compared to dynamic methods; those are addressed in the subsequent sub-chapter. A large variety of static investment appraisal tools exist. The two methods that are primarily applied by companies70, and are also by far the most treated ones in 69 70 See for example Dayananda et al. (2002: p91). See for example Watson/Head (2007: p199ff), McLaney (2006: p96f), or Drury (2004: p512) who quote several empirical studies that illustrate the high dissemination of accounting rate of return and payback period among companies.

See for instance Kruschwitz (2007: p33ff), Götze et al. (2007: p39ff), or Röhrich (2007: p24ff) for discussions of the profit comparison approach to investment appraisal. 3 Fundamental Dynamic Methods A multitude of dynamic investment appraisal methods have been developed over the years. The two dynamic methods that receive by far the most attention in investment literature and that are also most frequently applied by companies86, are the 'net present value' (NPV) method and the 'internal rate of return' (IRR) method.

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