Chisini Means and Rational Decision Making: Equivalence of Investment Criteria

Mathematics and Financial Economics, 2018, 12(2), 193-217

35 Pages Posted: 18 Sep 2017 Last revised: 1 Oct 2018

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

Piero Veronese

Bocconi University - Department of Decision Sciences

Rebecca Graziani

Bocconi University - Department of Policy Analysis and Public Management

Date Written: September 14, 2017

Abstract

A plethora of tools are used for investment decisions and performance measurement, including Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Modified Internal Rate of Return (MIRR), Average Accounting Rate of Return (AARR). All these and other known metrics are generally considered non-equivalent and some of them are regarded as unreliable or even naive. Building upon Magni (2010a, 2013)'s Average Internal Rate of Return (AIRR), we show that the notion of Chisini mean enables these tools to be used as rational decision criteria. Specifically, we focus on 11 metrics and show that, if properly used, they all provide equivalent accept-reject decisions and equivalent project rankings. Therefore, the intuitive notion of mean is the founding basis of investment decision criteria.

Keywords: Value creation, equivalence class, accept-reject decisions, project ranking, Net Present Value, Average Internal Rate of Return

JEL Classification: G10, G11, G12, G30, G31, M2, M41, C00, D46

Suggested Citation

Magni, Carlo Alberto and Veronese, Piero and Graziani, Rebecca, Chisini Means and Rational Decision Making: Equivalence of Investment Criteria (September 14, 2017). Mathematics and Financial Economics, 2018, 12(2), 193-217, Available at SSRN: https://ssrn.com/abstract=3037103

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

Piero Veronese

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

Rebecca Graziani

Bocconi University - Department of Policy Analysis and Public Management ( email )

Via Roentgen 1
Milan, 20136
Italy

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