Effective Appraisal Approaches And Its Influence On Investment Decision Making

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In business, in the word of investment can be defined as the outflow of money for the purchase of valuable item with an expectation of positive future return or the purchase of equipment or inventory by owner in order to improve future business. (Kahraman, 2011) Moreover, the part of decision-making acts a crucial role in business investment that depends upon the investor’s profit expectation, the availability to finance the investment and the potential cost of assets. (Virlics, 2013) However, risk and uncertainty are the basic terms to the decision-making framework. Risk can be defined as the probability of outcomes or loss that is caused by internal or external vulnerabilities where the probabilities of the possible negative occurrence…show more content…
(Kahneman & Tversky, 1979) It also can be assigned by the probabilities and calculated by taking the average of weight of all possible outcomes under certain circumstance. (Investopedia organization, 2015) To be more specific, the expected utility of an act is a weighted average of the utilities out of their potential outcomes, where the utilities of an outcome measures the extent to which that outcome is preferred to the alternatives. The utility of each outcome is weighted depending on the probability of which outcome will it be led to. (Stanford University, 2014) On the other hand, the form of prospect theory is developed by Kahneman & Tversky (1992) through a value function (1979), which is defined on gains and losses that related to a reference point, and is normally curving inward for gains, commonly curving outward for losses. Additionally, prospect theory can be defined as a descriptive model of decision-making under risk, which is designed to better explain how individuals actual choice-making between different options and prospects. It also evaluates an outcome based on the alternation of total resources and judges by gains and losses that related to the status. (Wen, 2010) Under prospect theory, value is allocated to gains and losses rather than to final assets. Moreover, the investment decision-making is an analogy to the behaviour of
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