Real Investments Under Knightian Uncertainty

84 Pages Posted: 27 Feb 2004

See all articles by Johan Walden

Johan Walden

University of California, Berkeley - Finance Group

Date Written: January 26, 2004

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. For example, high hurdle rates for venture capital, and stalled investments in several broadband markets are consistent with the model.

JEL Classification: G31, D8, G24

Suggested Citation

Walden, Johan, Real Investments Under Knightian Uncertainty (January 26, 2004). Yale ICF Working Paper No. 04-08. Available at SSRN: https://ssrn.com/abstract=509643

Johan Walden (Contact Author)

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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