Decision Sciences Journal
Volume 28, Number 1
Winter 1997
Cognitive Limitations and Investment "Myopia"
Tailan Chi
School of Business Administration, University of Wisconsin-Milwaukee, Milwaukee, WI 53201-0742, e-mail: chi@csd.uwm.edu
Dashan Fan
Department of Mathematical Science, University of Wisconsin-Milwaukee, Milwaukee, WI 53201-0413, e-mail: fan@csd.uwm.edu
ABSTRACT
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.
Subject Areas: Cognitive Bias, Investment Decision Making, Project Management, and Stochastic Models.
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