Project Valuation in the Presence of Loss Aversion During Economic Crises

Strategic Change: Briefings in Entrepreneurial Finance, Vol. 20, Nos. 5/6, pp. 171-86, 2011

33 Pages Posted: 22 Apr 2008 Last revised: 15 Jun 2016

See all articles by Arvind Ashta

Arvind Ashta

CEREN EA 7477 Burgundy School of Business - Université Bourgogne Franche-Comté

Philipp E. Otto

European University Viadrina

Date Written: November 19, 2010

Abstract

During and after economic crisis, there is a tendency to have less projects approved owing to loss aversion. The paper introduces a modification of the risk premium in order to take into account one behavioral aspect, that of loss aversion, which is not considered in the traditional method. Loss aversion distinguishes losses from gains in a nonlinear value function. Thus, if the range of possible outcomes includes losses and gains, the use of beta is put into doubt. The paper examines possible ways to save the use of beta for discounted cash flow analysis by revising the standard formulae and it provides a simulation with this newly generated method.

Keywords: behavioral finance, corporate finance, project evaluation, WACC, cost of capital, psychology, bias

JEL Classification: D7, D8, D81, D21, D23, G31, L2

Suggested Citation

Ashta, Arvind and Otto, Philipp E., Project Valuation in the Presence of Loss Aversion During Economic Crises (November 19, 2010). Strategic Change: Briefings in Entrepreneurial Finance, Vol. 20, Nos. 5/6, pp. 171-86, 2011. Available at SSRN: https://ssrn.com/abstract=1123511

Arvind Ashta (Contact Author)

CEREN EA 7477 Burgundy School of Business - Université Bourgogne Franche-Comté ( email )

29 rue Sambin
21000 Dijon
France

Philipp E. Otto

European University Viadrina ( email )

Microeconomics Department
Grosse Scharrnstr. 59
D-15230 Frankfurt (Oder)
Germany

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