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Living with Noise: Investing and Valuation in the Face of Uncertainty

34 Pages Posted: 20 Sep 2013  

Aswath Damodaran

New York University - Stern School of Business

Date Written: July 10, 2013

Abstract

Uncertainty is a fact of life in business and investing, but the responses that analysts and investors have to uncertainty is often unhealthy, ranging from denial and paralysis, at one extreme, to rules of thumb that have no basis in common sense, at the other. In this paper, we look at how uncertainty is embedded in all valuations, though the amount of uncertainty you face will vary across companies, countries and across time. We categorize uncertainty into groups, estimation versus economic, micro versus macro and discrete versus continuous, and argue that each grouping needs a different response. Finally, we develop tools that we can use to get a handle on uncertainty and deal with it better in valuation.

Keywords: valuation, risk, uncertainty

JEL Classification: G10, G12, G30

Suggested Citation

Damodaran, Aswath, Living with Noise: Investing and Valuation in the Face of Uncertainty (July 10, 2013). Available at SSRN: https://ssrn.com/abstract=2323621 or http://dx.doi.org/10.2139/ssrn.2323621

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

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