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Towards a better understanding of capital investment decisions

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Purpose ‐ The purpose of this paper is to examine the capital investment process, guided by concepts from cognitive and social psychology. The intention is to gauge the extent to which managerial judgement can be detected by applying a psychological lens to the process. Initial fieldwork is subsequently reported on the extent to which managerial judgement is managed. Discovery of variations suggest an alternative perspective on understanding capital investment decisions (CIDs) that may be potentially worthwhile in understanding the long-term success and survival of modern commercial enterprises. Design/methodology/approach ‐ Following a systematic review, employing the psychological concepts of heuristics, framing and concensus to prior case and fieldwork studies, the CID process in three companies engaged in new market/site development projects is reported. The participants initially responded to a survey and subsequently agreed to be interviewed about their processes and involvement. Findings ‐ The psychological concepts provided a satisfactory gauge of managerial judgement. The fieldwork revealed variety in the management of the CID process and the influence of managerial judgement. Research limitations/implications ‐ There is an increasing call to examine the CID by case or fieldwork but, to date, the role managerial judgement plays has not been directly addressed. Applying psychological concepts to the CID process offers an opportunity to focus enquiries and improve understanding of corporate practices. Practical implications ‐ The relative reliance companies place on heuristics, framing and consensus within their specific organizational contexts ultimately may provide insights to the long-term survival of companies. Originality/value ‐ The paper provides useful information on the cognitive and social psychology in the capital investment process.
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Keywords: Capital; Decision making; Investment appraisal; Investments; Managers

Document Type: Research Article

Publication date: November 2, 2010

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