Abstract
Investment is present sacrifice for future benefit. Individuals, firms, and governments all are regularly in the position of deciding whether or not to invest, and how to choose among the options available. An individual might have to decide whether to buy a bond, plant a seed, or undertake a course of training; a firm whether to purchase a machine or construct a building; a government whether or not to erect a dam. Under the heading of investment decision criteria, economists have addressed the problem of how to choose rationally in situations that involve a tradeoff between present and future.
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Bibliography
The modern theory of investment and intertemporal choice was set down in classic form by Irving Fisher as part of his great works on interest (1907, chapters 8–9; 1930, chapters 10–13). The seminal works on uncertainty theory include Arrow (1953) for the state-preference approach and Markowitz (1959) and Sharpe (1964) for the mean-versus-variability model. Choice over time and choice under conditions of uncertainty are integrated in the treatise by Hirshleifer (1970) that builds upon these foundations. All these topics have been followed up in an enormous literature, of which only a few illustrative instances can be cited here: on investment decision formulas, Samuelson (1976); on utility-free or dominant choices, Pye (1966), Hanoch and Levy (1969), and DeAngelo (1981). A survey of investment decision criteria used in current business practice appears in Schall, Sundem, and Geijsbeek (1978).
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Hirshleifer, J. (2018). Investment Decision Criteria. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_896
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DOI: https://doi.org/10.1057/978-1-349-95189-5_896
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