Application of Prospect Theory and Fuzzy Logic to Decision-Making Based on Cash Flow Analysis Results

These days financial investments in companies become more and more available to the broad range of people. In order to support financial analysis, a significant number of various methods and tools have been proposed recently. However, almost all of these methods do not take uncertainty related to input parameters of the analysis into account. This situation can lead to imprecise and unreliable results, forcing investor to make reckless decisions. Fuzzy logic is a field of study that helps to deal with uncertainty and allows to represent imprecise, vague or fuzzy inputs in order to process them without loss of important information. One of the most important goals of study is to develop fuzzy logic extension to cash flow evaluation that would allow to deal with uncertainty which can arise in process of imprecise estimation of input parameters. Another important aspect covered in the paper is approach to analysis result explanation for wiser decision-making. Proposed method utilizes prospect theory propositions, that include attitude to risk and perception of losses and gains, in order to fit investor’s psychological characteristics in better way. Finally, the study examines ways to simplify financial analysis for rough analysis in cases when there is a limited capability to gather comprehensive statistics and/or uncommon criteria for alternatives evaluation. Proposed approach is based on TODIM decision-making method and allows to easily add or remove criteria of evaluation and, thus, serve as very handy method to quickly assess the appeal of company in terms of investments.