The investment decision under uncertainty

The investment decision under uncertainty by H. M. WELLS, Pr. Eng., M.Se. (Fellow) The future outcome of a proposed investment is uncertain at the time the decision must be made to accept it or reject it. This uncertainty can be expressed in the form of a probability distribution. An attempt is made to rationalize the investment decision under these circumstances, especially when the range of possible outcomes extends into both the acceptable and unacceptable domains. A rigorous definition of risk is proposed, and a criterion of risk aversion is developed that forms the boundary between acceptable risk and unacceptable risk (called the loss limitation line). It is shown that this decision criterion can also serve as a quantitative yardstick in the evaluation of various possibilities for 'tailoring' the proposal to mlke it more compatible with the particular financial circumstances of the company concerned.