THE VALUE OF MONEY AND THE FLAW-OF-AVERAGES

Paul Kruger, Sarma Yadavalli

Abstract


Given the state of uncertainty in the world, decision analysis and decision-making under conditions of uncertainty are becoming more important. However, any rational decision-making requires a criterion on which to base the decision — which implies the availability of a value system. This paper will provide a short introduction to the basic principles of some value systems and related concepts such as the value of money, the flaw-of-averages, interest and discount rates, utility theory, and decision analysis. It will employ a Monte Carlo simulation approach to investigate the possible influence of the flaw-of-averages on interest calculations, net present value calculations, and decision trees. It will show that, under certain circumstances, the flaw-of-averages might be present and significant.


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DOI: http://dx.doi.org/10.7166/29-2-1968

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Copyright (c) 2018 Paul Kruger


ISSN 2224-7890 (on-line) ; ISSN 1012-277X (print)


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