Investment Under Uncertainty: A Theory

Abstract

There must be a restricted time horizon within which investors trust their anticipations in an uncertain condition. In this circumstance investors are concerned about what happens if the worst condition (i.e. decreasing prices) occurs. A best-worst strategy in a discounted payback period framework is applied to examine the effect of uncertainty on the time horizon and investment. The model shows that increasing uncertainty will reduce the time horizon as well as investment. Moreover, the calculated time horizon can be considered as a benchmark for the adjusted payback period approach in finance.Uncertainty, Investment, Discounted payback period, best-worst strategy