Applying the Learning Curve In Financial Decisions

Finance text books ignore the systematic impact of learning on financial decisions, and survey results suggest that practitioners fail to consider the benefits of learning. We propose that instructors should include the learning curve and its specific measure of the benefits of learning when teaching financial decision making. This paper applies the learning curve to capital budgeting, although the instructor can introduce the idea and its application in many areas of finance. The paper presents the mathematics of the learning curve (including a short-cut method), then applies the learning curve to the labor cost of an example capital project. We calculate the undiscounted difference between operating cash flows without and with learning to illustrate the systematic impact of learning. We note that applying the learning curve in financial decisions presents cost estimates that are trackable and teaches students the correct way to consider systematically the benefits from learning. Page 2 of 1