Cognitive Limitations and Investment "Myopia"

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Issue Date
1997Author
Chi, Tailan
Fan, Dashan
Publisher
Wiley
Type
Article
Article Version
Scholarly/refereed, author accepted manuscript
Metadata
Show full item recordAbstract
Optimization of investment decisions in an uncertain and dynamically evolving
environment is difficult due to the limitations of the decision maker’s cognitive
capacity. Thus, actual investment decisions may deviate from the dynamically
optimal decision rule. This paper investigates how a potential investment rule bias
affects the expected payoff from a project that has an uncertain development time
and an uncertain completion cost. The result shows that the presence of a
potential bias in the adopted decision rule dissipates project value and that the
dissipating effect is greater for a longer-term project if the completion cost is an
increasing function of the time to completion.
Description
This is the author's final draft. The publisher's official version is available electronically from: http://dx.doi.org/10.1111/j.1540-5915.1997.tb01301.x
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Citation
Chi, Tailan. (1997) Cognitive Limitations and 'Investment Myopia'. Decision Sciences, 28 (1), 27-57. http://dx.doi.org/10.1111/j.1540-5915.1997.tb01301.x
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