By Sebastian Serfas
In today’s aggressive company atmosphere, an optimum funding procedure is essential for each corporation. even though, it's always endangered through subconscious psychological biases inherent in each individual. construction on findings from cognitive psychology study, Sebastian Serfas indicates intimately that and the way those so-called cognitive biases systematically impact and deform capital investment-related selection making and company decisions. He presents a great number of examples that each company practitioner may perhaps come upon on a daily basis, demonstrates the hazardous results via a number of empirical experiments, and descriptions strength counterstrategies to mitigate those damaging effects.
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Extra info for Cognitive Biases in the Capital Investment Context: Theoretical Considerations and Empirical Experiments on Violations of Normative Rationality
Several basic assumptions about the mind underlie cognitive psychology. As a starting point, cognitive psychology is "based on the idea that we are like a computer when processing information and have an input, storage and retrieval function" (Brown, 2006: p6) and that "the mind is viewed as an information processing system through which people interact with the external world" (Andrade/May, 2004: p2). Early cognitive psychologists believed that this information processing is always bottom-up and serial: bottom-up processing means that the processing is triggered and directly affected only by external, environmental stimulus input133, not by internal factors, and serial processing assumes that "only one process occurs at any moment in time […] and means that 130 131 132 133 See for example Brown (2006: p6) or Balota/Marsh (2004: p1) for additional definitions of cognitive psychology.
See for example Götze et al. (2007: p68), Atrill/McLaney (2002: p206), or Röhrich (2007: p79). 34 2 Theoretical Foundations of Capital Investments and Investment Appraisal into account the amount and timing of all relevant cash flows102 as well as their time value, and thus overcomes the major disadvantages of the earlier presented static appraisal methods. However, with regard to its inherent basic assumptions, the internal rate of return method suffers from the same deficiencies as the net present value approach.
52 Using formalized decision models in a business-related context usually improves decision making and delivers several potential benefits for the decision maker and the respective company:53 they improve the consistency of 48 49 50 51 52 53 See Bamberg/Coenenberg (2002: p13f). Assumptions can generally be either explicit or implicit; however, in the particular case of decision models, it is preferrable that all assumptions are made explicit. See for example Adam (1996: p81ff) for a detailed discussion of model classification according to five different criteria.
Cognitive Biases in the Capital Investment Context: Theoretical Considerations and Empirical Experiments on Violations of Normative Rationality by Sebastian Serfas