Project Appraisal under Uncertainty
If the assumption of certainty is relaxed one moves into the highly problematic world of risk or uncertainty. Theorists often distinguish between risk and uncertainty, arguing that risk refers to situations where the possible future outcomes of a present decision are plural but the dimensions and probabilities of these outcomes are known in advance; while uncertainty also refers to a situation where the possible future outcomes are plural but their dimensions and probabilities cannot be objectively specified in advance. C. Jackson Grayson suggests that the distinction has little meaning in business decisions, ‘Most business decision-makers have some feelings about the probability of future events ranging from a high degree of confidence to very vague and ill-defined feelings. They are neither completely ignorant nor do they feel that they know the probabilities of future events.’ (G1 p. 91) This view is taken in this chapter and the terms of uncertainty and risk are used interchangeably.
KeywordsUtility Function Risk Premium Risk Preference Beta Coefficient Indifference Curve
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