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The Journal of Finance used by the firm. Even if the expected value of Vâ 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 Joeâs estimates. Let V* be the corrected estimate such that E(V*/A,PSS) V and = V* = Vâ + E[ (V - Vâ) \ A ,PSS] for a selected project. If Vâ is an unbiased estimate prior to project selection, then the correction term for a selected project, E[ (V - Vâ) [A, PSS], will be negative or at most zero. The relative size of the correction term as compared with Vâ is a function of Joeâs 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
The Journal of Finance – Wiley
Published: Sep 1, 1974
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