Criteria for Capital Investment: An Approach Through Decision Theory

Abstract

The arbitrary character of such concepts as “Discounted Present Worth”, which are often advocated as methods of assessing and comparing investment opportunities, is discussed in Part 1 of this paper. It is also pointed out that, by their nature, these concepts are not particularly well adapted to situations in which “risk” is an important factor. In order to develop a method in which a logical approach to risk can be adopted, an understanding of the basic problem of Decision Making under Uncertainty is required. An introduction to this subject forms Part 2 of this paper. In Part 3 the problem of Plant Investment under Risk is considered, and a rational approach to this is developed. The importance of the “portfolio” concept in such problems is particularly demonstrated.

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