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Abstract–Behavioral Risk Constraints in Capital Budgeting

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  • Joy, O. Maurice
  • Barron, F. Hutton

Abstract

This paper presents a descriptive theory of risk that may be applied to capital budgeting decisions. The proposed theory is actually much more general than a theory of financial risk and is consistent with reported laboratory experiments. The essential feature of this theory is the role that risk descriptively plays as a constraint in the decision-making process. Specifically, risk is modeled as a chance constraint such that projects are rejected if the probability of “failure†is larger than some prescribed level. This has the effect of making all investment decisions chance-constrained programming problems, although some classes of problems have trivial solution procedures. In this context, risk serves to “strike out†or eliminate alternatives from consideration.

Suggested Citation

  • Joy, O. Maurice & Barron, F. Hutton, 1974. "Abstract–Behavioral Risk Constraints in Capital Budgeting," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(5), pages 763-763, November.
    • Handle: RePEc:cup:jfinqa:v:9:y:1974:i:05:p:763-763_02
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