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Real Investments under Knightian Uncertainty

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  • Johan Walden

Abstract

In a model of real investments with Knightian uncertainty, decision makers deviate from expected utility theory by showing excessive risk aversion and focusing on no regret moves. Within the model, a positive net present value is no longer sufficient to ensure that a real investment is undertaken. Furthermore, the value of being able to hedge increases drastically. The model could explain deviations from the net present value rule in industries where Knightian uncertainty is high.

Suggested Citation

  • Johan Walden, 2004. "Real Investments under Knightian Uncertainty," Yale School of Management Working Papers amz2496, Yale School of Management, revised 01 Apr 2004.
    • Handle: RePEc:ysm:wpaper:amz2496
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    File URL: https://repec.som.yale.edu/icfpub/publications/2496.pdf
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    Cited by:

    1. Ravi Dhar & William Goetzmann, 2005. "Institutional Perspectives on Real Estate Investing: The Role of Risk and Uncertainty," Yale School of Management Working Papers ysm457, Yale School of Management, revised 01 Jul 2005.

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