BEC 6.6

Question 1

List the major valuation methods

Answer 1

• Discounted Cash Flow (DCF)
• Price Multiples
  
  • Price Earnings (P/E)
  • PEG (Price/Earnings per unit of growth)
  • Price Sales (Price/Sales)

Question 2

List the behavioral issues that potentially distort decisions

Answer 2

• Assuming stereotyped characterizations are accurate
• Adjusting from presumed baselines
• Using intuition rather than analysis
• Excessive optimism
• Confirmation bias or using only data that supports conclusions
• Overconfidence
• Illusion of control

Question 3

What decision context or environment is considered the most distracting?

Answer 3

Losses are considered the most distracting backdrop for decisions (far more distracting than gains)

Question 4

What is the implication of an “Aversion to a sure loss”?

Answer 4

Manager’s fears of accepting a known or guaranteed loss may actually increase losses as projects are continued and losses are sustained longer than appropriate in hopes that the project will become profitable