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Economic Risk Exposure of Selected Projects and Risk Attitude of Investors; Evidence from Liberia

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  • Gul, Ejaz
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Abstract

Investment 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48221.

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Date of creation: 09 Jul 2013
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Handle: RePEc:pra:mprapa:48221

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Keywords: Investment; economic; risk exposure; probability function; risk attitude; utility function.;

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  1. Arrow, Kenneth J, 1994. "Methodological Individualism and Social Knowledge," American Economic Review, American Economic Association, vol. 84(2), pages 1-9, May.
  2. Eckel, Catherine C. & Grossman, Philip J., 2008. "Men, Women and Risk Aversion: Experimental Evidence," Handbook of Experimental Economics Results, Elsevier.
  3. Hausman, Daniel M & McPherson, Michael S, 1993. "Taking Ethics Seriously: Economics and Contemporary Moral Philosophy," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 671-731, June.
  4. Brennan, Timothy J., 1993. "The Futility of Multiple Utility," Economics and Philosophy, Cambridge University Press, vol. 9(01), pages 155-164, April.
  5. Broome,John, 1999. "Ethics out of Economics," Cambridge Books, Cambridge University Press, number 9780521642750, April.
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  1. #HEJC papers for August 2013
    by academichealtheconomists in The Academic Health Economists' Blog on 2013-07-31 23:00:48

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