Principles of Managerial Finance, 15th Edition

12.2 Behavioral Approaches for Dealing with Risk

1. LG2

Firms use behavioral approaches to get a “feel” for a project’s risk, whereas other approaches try to quantify and measure project risk. Here we present a few behavioral approaches to dealing with risk in capital budgeting: breakeven analysis, scenario analysis, and simulation.

Matter of Fact

What Does Your Gut Say?

A survey of more than 1,000 U.S. CEOs asked business leaders what tools they used to allocate capital within their firms. The leading answer, given by almost 80% of the survey respondents, was that CEOs use the NPV method to decide how to invest the firm’s money. But nearly half the CEOs also said that their “gut feel” for a project was an important factor in their decisions. ...