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- Title
INVESTMENT DECISION UNDER UNCERTAINTY: CHOICE-THEORETIC APPROACHES.
- Authors
Hirshleifer, J.
- Abstract
This article discusses a treatment of risky or uncertain choice that is a generalization of economist Irving Fisher's theory of riskless choice over time. Investment is, in essence, present sacrifice for future benefit. But the present is relatively well known, whereas the future is always an enigma. Investment is also, therefore, certain sacrifice for uncertain benefit. The theory of investment decision has been satisfactorily developed, in the great work of Fisher, only under the artificial assumption of certainty. Despite the restrictiveness of this assumption. Fisher's theory does succeed in explaining substantial portions of observed investment behavior. But other portions cannot apparently be explained without bringing in attitudes toward risk and differences of opinion, sources of behavior that only come into existence under uncertainty. Among the phenomena left unexplained under the certainty assumption are: the value attached to liquidity, the willingness to buy insurance, the existence of debt and equity financing, and the bewildering variety of returns or yields on various forms of investment simultaneously ruling in the market. One surprising aspect of the time-and-state preference model is that it leads to a theory of decision under uncertainty while entirely excluding the vagueness usually associated with uncertainty.
- Subjects
RISK; INVESTMENTS; UNCERTAINTY; DECISION theory; FISHER, Irving, 1867-1947
- Publication
Quarterly Journal of Economics, 1965, Vol 79, Issue 4, p509
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/1880650