Quality of Benefits

Probably the most important technical limitation of profit maximization as in operational objective, is that it ignores the quality aspect of benefits associated with a financial course of action. The term quality here refers to the degree of certainty with which benefits can be expected. As a rule, the more certain the expected return, the higher is the quality of the benefits. Conversely, the more uncertain fluctuating is the expected benefits, the lower is the quality of the benefits, An uncertain and fluctuating return implies risk to the investors. It can be safely assumed that the investors are risk averters, that is, they want to avoid or at least minimize risk. They can, therefore, be reasonably expected to have a preference for a return which is more certain in the sense that it has smaller variance over the years,

The problem of uncertainty renders profit maximization unsuitable as an operational criterion for financial management as it considers only the size of benefits and gives no weight to the degree of uncertainty of the future benefits. This is illustrated in Table 1.2.

reCAPTCHA is required.

Share This