Real Investments under Knightian Uncertainty

Johan Walden

Yale School of Management Working Papers from Yale School of Management

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.

Date: 2004-03-01, Revised 2004-04-01
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