Economic Risk Exposure of Selected Projects and Risk Attitude of Investors; Evidence from Liberia

Ejaz Gul

MPRA Paper from University Library of Munich, Germany

Abstract: Investment in long lived projects such as buildings are characterized by uncertainties regarding project life, operation and maintenance costs, revenues and other factors that affect project economics. Since the exact values of these variable factors are usually unknown, it is difficult to make economic evaluations with a high degree of reliability. A common approach to project investment analysis is to apply the economic methods for estimates of project input variables and to present results in single value, deterministic terms. Yet failures to account for uncertain input variables expose the decision makers to risk. Current research is about quantifying the economic risk exposure of the projects and willingness of investors to take a chance on an investment of uncertain outcome based on risk attitude. Paper explains typical investment situations of decision makers who do not know with certainty the outcome of their investment and illustrates with probability distribution a way of measuring risk exposure and introduces the use of utility functions to determine a decision maker’s risk attitude. It is concluded from the study that to determine the true value of investments for risk takers, economic analysis must account for increasing marginal satisfaction of higher payoffs with corresponding increases in marginal utility. A firm or institution can use utility theory in a normative or prescriptive role to establish risk policy for investments that support the firm’s or institution’s risk attitude. Overall the paper provides a useful study on economic risk exposure of projects and risk attitudes of investors in Monrovia, the capital of Liberia.

Keywords: Investment; economic; risk exposure; probability function; risk attitude; utility function. (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2013-07-09
New Economics Papers: this item is included in nep-ppm and nep-upt
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