Microeconomics: Theory and Applications with Calculus, 4e

16.4 Investing Under Uncertainty

Don’t invest with anyone named Slick.

We now investigate how uncertainty affects the investment decision. In particular, we examine how attitudes toward risk affect individuals’ willingness to invest, how people evaluate risky investments that last for many periods, and how investors pay to alter their probabilities of success.

In the following examples, the owner of a monopoly decides whether to open a new store. Because the firm is a monopoly, the owner’s return from the investment does not depend on the actions of other firms. As a result, the owner faces no strategic considerations. The owner knows the cost of the investment but is unsure about how many people will patronize the new store; hence, the profits ...