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By Sebastian Serfas

In today’s aggressive company surroundings, an optimum funding technique is essential for each corporation. despite the fact that, it is usually endangered by way of subconscious psychological biases inherent in each man or woman. construction on findings from cognitive psychology learn, Sebastian Serfas exhibits intimately that and the way those so-called cognitive biases systematically have an effect on and warp capital investment-related choice making and enterprise decisions. He offers a good number of examples that each enterprise practitioner may perhaps come across on a daily basis, demonstrates the hazardous results via a variety of empirical experiments, and descriptions strength counterstrategies to mitigate those damaging effects.

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

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46 3 Theoretical Foundations of Cognitive Biases Cognitive psychologists today have an increasing multitude of tools and methods to analyze and examine the various information processing activities of the brain, which is to a certain extent also due to the technological advancements during the last decades. In line with these tools, five different approaches of cognitive psychology, also referred to as sub-disciplines by some authors, can be distinguished, which are briefly summarized in the following list: 142 1.

Due to their high resemblance, return on capital employed (ROCE) and accounting rate of return are sometimes used as synonyms. However, while ARR refers to specific investment projects, ROCE is actually used to assess the performance of a whole company or a business unit74. The advantages of the accounting rate of return method are that it is simple, quick and intuitively easy to understand, which make this method a widely-used tool among companies. However, in addition to potential problems when comparing investments with different sizes, and its major drawback of ignoring the 71 72 73 74 Although the following descriptions are, in line with the intention of this chapter, kept rather short, several references for further information regarding the discussed methods are provided throughout the respective discussions.

2 Fundamentals of Decision Theory and Decision Models 23 the outcomes arising from each act" (Resnik, 1987: p14) – this includes known or given probabilities as well as reasonably estimated probabilities –, ignorance means that there is no suitable indication of any likelihoods and "it makes no sense to assign probabilities to the outcomes emanating from one or more of the acts" (Resnik, 1987: p14). The implications of this distinction between certainty, risk and ignorance must be taken into account when developing a decision model.

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