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Probabilistic Approaches in Investment Decision Making and their Implementation

Author

Listed:
  • Jiří Fotr
  • Lenka Švecová

Abstract

The success of investment projects depends largely on the quality of integration of risks and uncertainty in the process of preparation of these projects, their evaluation and decisions on acceptance or rejection. This article first characterizes the shortcomings of traditional onescenario approach for evaluating projects within investment decision making. The main focus is on probabilistic tools, mainly on scenarios and Monte Carlo simulation. The article characterizes principles of the tools, their common features and differences, examples of usage in the investment decision making. Also covered are strengths and weaknesses of the tools, and application of Monte Carlo simulation in risk analysis of investment projects is illustrated on practical example. In conclusion, the article discusses barriers of implementation of scenarios and Monte Carlo simulation and proposes a set of recommendations increasing the success of integration of these tools into the investment decision making.

Suggested Citation

  • Jiří Fotr & Lenka Švecová, 2010. "Probabilistic Approaches in Investment Decision Making and their Implementation," Ekonomika a Management, Prague University of Economics and Business, vol. 2010(1).
    • Handle: RePEc:prg:jnleam:v:2010:y:2010:i:1:id:85
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    More about this item

    Keywords

    analýza rizika; risk analysis; Investiční projekty; Riziko; Scénáře; Simulace Monte Carlo; Investment projects; Risk; Scenarios;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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