Real Investments under Knightian Uncertainty
Citations
45 citations
Cites background from "Real Investments under Knightian Un..."
...Walden (2004) shows how uncertainty – as opposed to risk – can lead to high investment hurdle rates and under-investment in a setting in which decisions are irreversible....
[...]
36 citations
14 citations
Cites background from "Real Investments under Knightian Un..."
...Walden (2004) modelled venture capitalists and found that they tended to hedge against high uncertainty but, if they were unable to hedge, and if the potential political decisions were perceived as irreversible, investment would stall and, when resumed, lead to higher hurdle rates....
[...]
6 citations
References
7,005 citations
"Real Investments under Knightian Un..." refers background in this paper
...To see how Knightian uncertainty influences decision making, let us review a variation of the classical Ellsberg paradox (Ellsberg 1961):...
[...]
...To see how Knightian uncertainty influences decision making, let us review a variation of the classical Ellsberg paradox (Ellsberg 1961): Example 1 : Ellsberg three-color example An urn contains 90 balls....
[...]
4,185 citations
2,898 citations
"Real Investments under Knightian Un..." refers background or methods in this paper
...To model decision making under Knightian uncertainty, we will use an intertemporal version of the multiple priors expected utility (MEU) model by Gilboa and Schmeidler (1989) (also known as the Maxmin Expected Utility model)....
[...]
...We generalize the Gilboa & Schmeidler model to an intertemporal setting (For details, see Appendix C)....
[...]
...Our approach to incorporating Knightian uncertainty into decision making follows the Gilboa and Schmeidler max-min theory....
[...]
...The Gilboa & Schmeidler (GS) approach to decision making follows the Anscombe & Aumann (AA) model in that it works on two-stage lotteries, where the first stage is a “state of the world horse lottery”, and the second is an “objective roulette lottery”....
[...]
...The rest of this paper is organized as follows: In Section 1, we review the multiple priors expected utility model by Gilboa and Schmeidler (1989), and motivate the use of multiple priors with a simple example....
[...]
2,686 citations
"Real Investments under Knightian Un..." refers background in this paper
...Difficulties to achieve diversification (leading to a priced idiosyncratic risk), and the illiquidity of venture capital investments will also lead to higher required discount rates (Sahlman 1990)....
[...]
...In a similar survey for Sweden’s 500 largest companies, Sandahl and Sjögren (2003) show that almost 35% of the respondents do not use NPV based methods for capital budgeting. Although the fraction of companies using NPV analyses is steadily rising2, there is still a significant fraction of companies that use capital budgeting analyses that are not NPV based. The companies in the surveys are not small (the smallest company in the survey has revenues of about $100 million in Graham and Harvey (2001) and $50 million in Sandahl and Sjögren (2003)) and considering the extent to which the NPV rule has been taught to MBA students over the last decades one might expect that the numbers would be higher....
[...]
...In a similar survey for Sweden’s 500 largest companies, Sandahl and Sjögren (2003) show that almost 35% of the respondents do not use NPV based methods for capital budgeting....
[...]
...…high discount rates could be required to compensate venture capitalists for taking an active role in management, to adjust for biases in financial projections from entrepreneurs, or alternatively to reflect that the cash flow estimates are conditional on the project being successful (Sahlman 1990)....
[...]
...We mention a sample: For venture capital, high discount rates could be required to compensate venture capitalists for taking an active role in management, to adjust for biases in financial projections from entrepreneurs, or alternatively to reflect that the cash flow estimates are conditional on the project being successful (Sahlman 1990)....
[...]
2,230 citations