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A NOTE ON THE APPARENT BIAS OF NET REVENUE ESTIMATES FOR CAPITAL INVESTMENT PROJECTS

A NOTE ON THE APPARENT BIAS OF NET REVENUE ESTIMATES FOR CAPITAL INVESTMENT PROJECTS The Journal of Finance used by the firm. Even if the expected value of V’ equals V, the expected value of V given that the project has been accepted may not equal V. The selection process may have introduced a bias; the expected values of accepted projects may (for the reason given above) be lower than Joe’s estimates. Let V* be the corrected estimate such that E(V*/A,PSS) V and = V* = V’ + E[ (V - V’) \ A ,PSS] for a selected project. If V’ is an unbiased estimate prior to project selection, then the correction term for a selected project, E[ (V - V’) [A, PSS], will be negative or at most zero. The relative size of the correction term as compared with V’ is a function of Joe’s assumed estimating accuracy and the sensitivity of the probability of selecting the project to over or underestimates of V. Ceteris paribus, the greater the variability of the estimating process, and the greater the sensitivity of the probability of selecting the project to likely over and underestimates of V, the larger the correction term is likely to be. These properties of the correction term can be illustrated http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

A NOTE ON THE APPARENT BIAS OF NET REVENUE ESTIMATES FOR CAPITAL INVESTMENT PROJECTS

The Journal of Finance , Volume 29 (4) – Sep 1, 1974

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Publisher
Wiley
Copyright
1974 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1974.tb03098.x
Publisher site
See Article on Publisher Site

Abstract

The Journal of Finance used by the firm. Even if the expected value of V’ equals V, the expected value of V given that the project has been accepted may not equal V. The selection process may have introduced a bias; the expected values of accepted projects may (for the reason given above) be lower than Joe’s estimates. Let V* be the corrected estimate such that E(V*/A,PSS) V and = V* = V’ + E[ (V - V’) \ A ,PSS] for a selected project. If V’ is an unbiased estimate prior to project selection, then the correction term for a selected project, E[ (V - V’) [A, PSS], will be negative or at most zero. The relative size of the correction term as compared with V’ is a function of Joe’s assumed estimating accuracy and the sensitivity of the probability of selecting the project to over or underestimates of V. Ceteris paribus, the greater the variability of the estimating process, and the greater the sensitivity of the probability of selecting the project to likely over and underestimates of V, the larger the correction term is likely to be. These properties of the correction term can be illustrated

Journal

The Journal of FinanceWiley

Published: Sep 1, 1974

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