Economic Risk Exposure of Selected Projects and Risk Attitude of Investors; Evidence from Liberia
AbstractInvestment in long lived projects such as buildings are characterized by uncertainties regarding project life, operation and maintenance costs, revenues and other factors that affect project economics. Since the exact values of these variable factors are usually unknown, it is difficult to make economic evaluations with a high degree of reliability. A common approach to project investment analysis is to apply the economic methods for estimates of project input variables and to present results in single value, deterministic terms. Yet failures to account for uncertain input variables expose the decision makers to risk. Current research is about quantifying the economic risk exposure of the projects and willingness of investors to take a chance on an investment of uncertain outcome based on risk attitude. Paper explains typical investment situations of decision makers who do not know with certainty the outcome of their investment and illustrates with probability distribution a way of measuring risk exposure and introduces the use of utility functions to determine a decision maker’s risk attitude. It is concluded from the study that to determine the true value of investments for risk takers, economic analysis must account for increasing marginal satisfaction of higher payoffs with corresponding increases in marginal utility. A firm or institution can use utility theory in a normative or prescriptive role to establish risk policy for investments that support the firm’s or institution’s risk attitude. Overall the paper provides a useful study on economic risk exposure of projects and risk attitudes of investors in Monrovia, the capital of Liberia.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 48221.
Date of creation: 09 Jul 2013
Date of revision:
Investment; economic; risk exposure; probability function; risk attitude; utility function.;
Other versions of this item:
- Gul, Ejaz, 2013. "URMI and its Integration into a framework for Ethics in Economics," MPRA Paper 48344, University Library of Munich, Germany.
- Gul, Rjaz, 2013. "Socio-Economic Context of Saving Biodiversity," MPRA Paper 48401, University Library of Munich, Germany.
- Gul, Ejaz, 2013. "Economic Evaluation of Project Site Using Cardinal Numbers Approach," MPRA Paper 48283, University Library of Munich, Germany.
- Gul, Ejaz, 2013. "Economic Efficacy of Road Traffic Safety Measures," MPRA Paper 48373, University Library of Munich, Germany.
- Gul, Ejaz, 2013. "Economic Evaluation of Road Traffic Safety Measures," MPRA Paper 48350, University Library of Munich, Germany.
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-20 (All new papers)
- NEP-PPM-2013-07-20 (Project, Program & Portfolio Management)
- NEP-UPT-2013-07-20 (Utility Models & Prospect Theory)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- #HEJC papers for August 2013
by academichealtheconomists in The Academic Health Economists' Blog on 2013-07-31 23:00:48
- Ejaz Gul & Imran Sharif Chaudhry, 2014. "Qualitative Assessment of Energy Initiative: Case Study from Liberia," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 4(3), pages 360-372.
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