Rules of thumb financial definition of rules of thumb
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rule of thumb an aid to decision-making involving the use of conventions or mechanistic formulas to determine prices, production schedules, advertising budgets etc. Rules of thumb are used as rough guides or approximations when, because of uncertainty, it is impossible to determine optimal solutions. Many firms, for example, use cost-based formulas to set prices, adding a conventional unit profit mark-up to costs, in the absence of totally reliable information about demand. Similarly, firms often set the value of their advertising budget as a fixed percentage of their sales revenue. See COST-BASED PRICING, UNCERTAINTY AND RISK.
rule of thumb a rough-and-ready decisionmaking aid that provides an acceptably accurate approximate solution to a problem. Where refined decision-making processes are expensive in terms of information-gathering and information-processing, then rules of thumb may be justified. For example, COST-PLUS PRICING may be used in practice by firms in the absence of sufficient knowledge about future demand and cost conditions to permit marginal weighting of revenues and costs to achieve an optimum decision. See RISK AND UNCERTAINTY.