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    Investment under ambiguity with the best and worst in mind

    Schröder, David (2011) Investment under ambiguity with the best and worst in mind. Mathematics and Financial Economics 4 (2), pp. 107-133. ISSN 1862-9679.

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    Abstract

    Recent literature on optimal investment has stressed the difference between the impact of risk and the impact of ambiguity - also called Knightian uncertainty - on investors' decisions. In this paper, we show that a decision maker's attitude towards ambiguity is similarly crucial for investment decisions. We capture the investor's individual ambiguity attitude by applying alpha-MEU preferences to a standard investment problem. We show that the presence of ambiguity often leads to an increase in the subjective project value, and entrepreneurs are more eager to invest. Thereby, our investment model helps to explain differences in investment behavior in situations which are objectively identical.

    Metadata

    Item Type: Article
    Additional Information: The final publication is available at link.springer.com
    Keyword(s) / Subject(s): Investment decision, Ambiguity, Knightian uncertainty, Ambiguity aversion, Optimism, Pessimism, Real option, Dynamic consistency, α-MEU preferences, D81, G11
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: David Schroeder
    Date Deposited: 28 May 2013 08:43
    Last Modified: 11 Oct 2016 11:59
    URI: http://eprints.bbk.ac.uk/id/eprint/6819

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