Investment Under Uncertainty: A Theory

Mellati, Ali (2008): Investment Under Uncertainty: A Theory.

Abstract

There must be a restricted time horizon within which investors trust their anticipations in an uncertain condition. In this circumstance investors are concerned about what happens if the worst condition (i.e. decreasing prices) occurs. A best-worst strategy in a discounted payback period framework is applied to examine the effect of uncertainty on the time horizon and investment. The model shows that increasing uncertainty will reduce the time horizon as well as investment. Moreover, the calculated time horizon can be considered as a benchmark for the adjusted payback period approach in finance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Uncertainty, Investment, Discounted payback period, best-worst strategy
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity

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