Risk-Sensitive Value Measure Method for Projects Evaluation

Abstract

In this paper we study the evaluation problems for random cash flows. We first consider the evaluation of random variables, which are supposed to present the random present values (RPV) of cash flows, and investigate what the suitable evaluation functional of RPV is. We see that the concave monetary value measure (or concave monetary utility function) is the most suitable candidate for this end. Next we extend the value measure to a dynamic value measure. Then we see that the idea of time-consistency is very important, and that the dynamic entropic value measure is the best one. We can see that this dynamic value measure is related to the risk sensitive control. And finally we conclude that the risk sensitive value measure method, which is a combination of the ideas such that monetary utility function, indifference price, real option approach, time-consistency and risk sensitive control, should be the most powerful method for the project evaluation. We also explain how to apply our results to practical problems.

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