Decision Making Using Behavioral Finance for Capital Budgeting

The accepted approach to capital budgeting leaves decision makers without appropriate guidance because it ignores the cognitive, organizational, and institutional dimensions of their decision-making process. This approach is based upon the unrealistic assumptions of neoclassical finance, where investors are assumed to be (or behave as if they were) fully rational and informed. This chapter explores the opportunity to analyze capital budgeting decisions within a more realistic context. To reach such an objective, it summarizes alternative perspectives addressing these specific dimensions: the cognitive, the organizational, and the institutional. All together, such dimensions suggest generalizing the current approach based on discounted cash flow analysis to provide decision makers with alternative ways to assess investment opportunities under more realistic approaches driven by behavioral and institutional finance.