On Regret Theory, and Framing Anomalies in the Net-Present-Value and the Mean-Variance Models

Investment Decision Analysis using NPV and or the Mean-Variance Model has become the primary method of investment evaluation. However, these approaches are deeply flawed and are very sensitive to the time horizon, the signs of the periodic cash flows, and discount rates that exceed 100% or are below -100%; and do not account for Real Options, Regret or Rejoice in decision making. This article contributes to the existing literature by: i) explaining behavioral and psychological biases inherent in financing decisions which contradict the NPV-MIRR model, ii) explaining existing and new Framing Effects inherent in the NPV-MIRR model – and critiquing Iturbe-Ormaetxe, Ponti, Tomás & Ubeda (2010); iii) surveying the recent and relevant literature on Regret Theory which explain how Regret Theory can serve as an alternative to the NPV-MIRR model for decision making; iv) explaining how the use of the NPV-IRR model is similar to ultimatum games and Rights-of-First-Refusal (ROFR) and critiquing Grosskopf & Roth (2009); v) explaining the biases and Framing Effects inherent in the Mean-Variance model