Investment under ambiguity with the best and worst in mind. (English) Zbl 1255.91394
Summary: 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 preferencesto 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.
Keywords:
investment decision; ambiguity; Knightian uncertainty; ambiguity aversion; optimism; pessimism; real option; dynamic consistencyReferences:
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