Investment under Uncertainty

Book Description

How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending.

This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.

Customer Reviews:

Not a new theory,but a new way of solving Keynes's theory.......2004-07-23

Dixit and Pindyck(DP)have not come up with a new theory of investment. The three aspects that they deal with in their theory are the irreversibility of costly fixed plant and equipment,the uncertainty of the information base upon which the probabilities will be estimated,and the timing of the investment project over a series of future time periods.DP correctly point out that the NPV rule does not deal with the uncertainty of the information base upon which the probabilities will be calculated while also ignoring the question of the timing of a project,given that additional new relevant information on the potential expected profitability of a project may be forthcoming in future time periods.Thus, there is a value that can be assigned to waiting for this additional relevant evidence to occur in the future.The Net Present Value( NPV) rule or the Capital Asset Pricing Model (CAPM)only deals with risk,not uncertainty.Both of these rules assume the existence of a unique,well defined probability distribution that satisfies the law of large numbers.A decision maker need only concern himself with the variability of the outcomes over time. This is measured by the standard deviation.DP demonstrate that the standard approach to investment theory discounts only for time and risk while ignoring uncertainty or conflating uncertainty with risk.DP advocate an additional discount for uncertainty.DP obtain this result using the calculus of variations, optimal control theory,stochastic control theory and dynamic programming.These techniques,while interesting ,are not necessary in order to obtain the given result.A much less advanced mathematical approach was used by John Maynard Keynes to obtain approximately the same result.A criticism of this book would be the failure on the part of DP to mention the similarities between their theory and that of Keynes.Keynes's theory is covered in chapters 11,12 and 17 of Keynes's 1936 book ,titled the General Theory(GT).In chapter 17 ,Keynes makes a very important addition to the theory of the previously mentioned chapters on pages 239-241 where Keynes points out that the decision maker must also discount for uncertainty as well as for risk and time preference.Keynes's footnote on page 240 of the GT directs the reader to his technical model contained in chapter 26 of A Treatise on Probability, called a conventional coefficient of weight and risk c.In order to obtain approximately the same result as obtained by DP,one needed only multiply Keynes's NPV model of chapter 11 of the GT by the c coefficient.

real options.......2004-05-03

ok, i found this book is very important and give a new vision to understant the world of investement under uncertainty , further it demonstrate a new application nommed real options, by this new model we can making same decision with integrating the notion of flexibility in procesus of investement

Not For The Faint-Hearted.......2000-01-28

Investment Under Undertainty by Avinash Dixit and Robert Pindyck has been an important book in the 1990's because it introduced a relatively new subject to a new and eager audience when there was little else available outside of original research papers. Many of us are grateful to the authors for this introduction. However, newcomers should be aware that they omit large and crucial details of implementation [example: chapter 4, section 1H, pages 110-112 including the graphs on page 111: a newcomer will be lost; if you wait until the appendix to chapter 10, on numerical solution, then you may or may not note the printing errors]. The book is not for the faint-hearted beginner; even the simplest material, such as valuation of a perpetuity (see Corporate Finance by Brealey & Myers - very easy) occurs in a form which the beginner or skim-reading manager might not readily recognise (chapter 5, section 1A, pages 138-139); but then this book is not for them.

See also Real Options by Lenos Trigeorgis, who writes as if he keenly wants you to have fast access to his subject. For someone writing purely on the mathematical finance aspects, read anything by Paul Wilmott, who is clearly both clever and an exceptional educator

dealing with uncertainty.......2000-01-06

When searching for a framework for my PhD, I encountered Dixit's 1991 exposition on investmetn under uncertainty, in Journal of Economic Perspective. I was immeadiately hooked on option theory and its applications. Both authors of this splendid book are authorities in this field. The book is ideal for advanced MBA students with some mathamatics background. It is also suitable for PhD students in economics and finance. However students with math or engineering backgrounds may also benefit from reading this book.

As this book has repeatedly demonstrate, investmet in a uncertain world involves exercising an option. I mat asure the readers and buyers alike, investing in this book will yield high returns for your time and money.

State of the art -- but math is a required subject.......1999-08-24

Let me say that this is not a book for those looking for investment advice or get-rich-quick schemes. It is also not a book for those who think that an MBA and an HP12C are all you need to understand the basic theory behind investments, options, etc.

Book Description

Since the 1970s, the practice of financing major private and public sector capital-intensive projects has shifted to an ever-greater reliance on private funding sources, as opposed to direct financing through the issuance of corporate or government bonds. In the 1990s, these financing practices have undergone further changes with the increasing globalization of capital markets, the growth of derivative instruments, and the rapid increase in information technology that enhances cash-management practices. Today's project financing market is increasingly using sophisticated capital market, bank and agency financing mechanisms as well as using derivative instruments for asset and liability management. Thus, financial market innovations are bringing the once separate fields of project financing and international finance more closely together. This is the first book to treat both topics as an interrelated whole, for contemporary project financing cannot be fully understood without a good working knowledge of the international financial markets that have developed the various financing techniques and funding sources being used. The book provides an in-depth description of cross-border project financing as a technique for financing capital-intensive projects, as well as an overview of certain financing and derivative instruments currently available in the global financial markets.
The first part of the book provides an overview of certain funding and derivative instruments currently used in the international financial markets, including a general overview of financial innovations that have occurred in recent decades. Topics covered include an introduction to the syndicated Euro-credit market; an overview of various marketable debt securities actively used in the international financial markets; an introduction to depositary receipt as an innovative way of raising cross-border equity capital; an elaboration of the derivative instruments most commonly used in the project financing arena, including interest rate, currency and commodity swaps; and finally an overview of banks' off-balance sheet activities as a critical driving force for the participation of banks in the international financial and derivative markets.
The second part of the book provides an in-depth analysis of project financing that concentrates on the financier's perspective. Topics covered include a general overview of the project financing industry; a step-by-step description of a typical cross-border project finance transaction; a description of the main characteristics and advantages of project financing as opposed to more traditional corporate lending practices; an overview of appraisal techniques for assessing project financing; a comprehensive analysis of the different risk management techniques used in project financing for reducing, distributing and hedging risks; and a brief overview of certain limited-resource financing schemes. The book includes a special focus on the various stages of the risk management process for project financing, elaborating on the different stages of risk identification, risk assessment, risk reduction, risk distribution and hedging and insurance. The authors also provide a comprehensive glossary of terms relating to international finance and project financing. This book will fulfill the need for an essential text on project financing as well as a professional reference guide.

Free Money from the Federal Government for Small Businesses and Entrepreneurs

Average customer rating:

Misleading is and understatement!!!
No Free Money!!!!!!!
I totally agree with all the other complaints
I wish I had read these reviews
Ways to Call Local Government Agencies for Loan Applications

Free Money from the Federal Government for Small Businesses and Entrepreneurs
Laurie Blum
Manufacturer: Wiley
ProductGroup: Book
Binding: Paperback

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ASIN: 0471130095

Book Description

A completely revised, updated edition of the bestselling guide to the millions of dollars available for free from the federal government

Even in the best of times, starting and running a small business can be an uphill battle. To help make life easier, Free Money(r) guru Laurie Blum shows you how to successfully tap into the hundreds of millions of dollars in government funding available free to entrepreneurs and small business owners. Grants range from $5,000 to some in the six figures, and best of all, absolutely none of them ever have to be paid back.

1,500 grants available from 52 government agencies

Complete addresses, phone and fax numbers, and contact names
Easy-to-use format with grants grouped by state and according to business category (agricultural, real estate, minorities, general business, R&D, etc.)
Step-by-step instructions on how to apply for a grant and how to write a winning proposal
Sample application forms and an extensive bibliography listing government and private foundation sourcebooks as well as other helpful publications

Customer Reviews:

Misleading is and understatement!!!.......2007-07-25

First of all I agree with what everyone has already said but I must reinterate what a waste this book is. I have had this book sitting around for a while and decided to take a look since I am lokking to start my own business. CAN YOU SAY REDUNDANT? How on gods green earth did this book even get published? It is a lot of nothing over and ove again not to mention that it is all about loans not free money! There are about two pages in the intro about how to write a proposal and thats it. Supposedly there are sample application forms but unless my book is missing something there is none of that either.... not that it matters. WHATEVER YOU DO NOT WASTE YOUR TIME OR MOMEY ON THIS BOOK. I noticed that the author has another book on Amazon called "Free money when you're unemployed" Lord only knows what is in there!!??

No Free Money!!!!!!!.......2007-07-15

I have been a small business consultant for years and have followed up on many of the claims about "guaranteed" sources for grants and start-up money from government and other sources. If you are starting a for-profit business unless you have a new technology of interest to the government or are creating a significant number of new jobs in a depressed area, there is very little possibility of obtaining a grant. Most are far better off putting their time and resources into planning and starting up their business than pursuing grants and spending money on books, lists and other meida like this claiming to have the "secret" to getting free money. Most, like this, only provide lists and links to places to apply for grants which do not apply to the vast majority of people. Save your money and go see your local Small Business Development Center from some real free assistance in starting a business.

I totally agree with all the other complaints.......2006-11-11

Since you can tell how I feel about this book based on the title of my review, I won't repeat everything that's been said by the other reviewers so far. However, I will say that, as a small business owner who tries very hard to spend money wisely, I am SO NOT HAPPY that I spent close to $20 for this book that is of absolutely no value to me. I don't want to throw it away, but I certainly can't see where anybody would want to buy it if I re-sold it. This book was a total waste of money--if there were a 0-star rating, I'd give it that without hesitation.

I wish I had read these reviews.......2001-03-16

I wish I had seen these reviews for this book. It is worthless in terms of information on obtaining funds for small business. If your handicapped or a minority it might be of some use for loans. Nothing relevent for myself as an individual with no startup capital.

Ways to Call Local Government Agencies for Loan Applications.......2000-08-14

I rarely rate a book as one star. This book is the exception.

My favorite gripe about books is that some of them have misleading titles designed to make them more appealing to book buyers. That certainly describes this book. The bulk of the programs listed in the book are LOAN programs. I don't think loans are a source of free money. Do you? The author never explains why these are sources of free money.

Usually, when I find a misleading title, I still find a mostly worthwhile book underneath. This book is the exception. Almost all of the programs listed come from either the Small Business Administration, the Agriculture Department, or Housing and Urban Development. Each of these organizations will help you over the telephone or send you material on the programs they make available. Web sites are also available.

Why, then, is the book so thick? That's because it lists the same agencies at the same address over . . . and over . . . and over . . . and over. You get the idea. Properly organized, this book could have been condensed to about 20 percent of its size, and would have been easier to use. That would have reduced the costs to the readers and the profits to the publisher and author. Can't have that, can we?

Let's look at the next problem. This book was published in this edition in 1996. There's been a lot of change in government programs since then. So undoubtedly, a lot of this information is out of date. A book like this should be updated at least every two years.

Finally, once you find out who to talk to or write to, what do you do? The book claims to help you design your application and use your grant properly. I found the material on that subject to be very brief and general. Few would find it adequate to succeed in even getting an SBA loan. Lengthy books are written on that subject alone!

If you want to get help from these agencies, find someone who has experience with them to help you (like your banker, attorney, accountant or neighbor). Even if you need to call information in your state to get the telephone number of the relevant governmental agency, that will still cost a lot less than this book.

Do not buy, and do not read this book.

If ever I have seen an example of a miscommunication about how to improve a business, it is in the form of this book. I encourage you to consider ways to redesign your business's basic operating model (perhaps through more outsourcing) as a way to reduce your need for capital, as a substitute to taking on loans from the Federal Government.

Book Description

An analysis of the major securities, derivatives and money markets from an operations point of view, 'Understanding the Markets' takes the reader through the major features and characteristics of the markets and the products. The relationship between the trading and dealing functions and the operations functions is examined and the issues discussed.

This book looks at the financial markets from the viewpoint of the person working in the operations functions that support the trading, dealing and investment processes, and as such is essential reading in order to fully understand the industry - an industry which has gone, and is still going through, much change.

As the markets undergo change so too do the administration, clearing and settlement functions, as the clearing houses, securities depositories and custodians merge and diversify. This is going to impact on the operations teams that support the trading, sales and retail business. A failure to be aware of and to understand the impact of changes in the markets will create massive problems, greater risk and ultimately financial losses. And yet the sheer size and diversity of the global markets, together with the rapid pace of change and expansion, and the increasing volume of transactions needing to be processed, presents a massive challenge to operations teams and managers.

Knowing how the markets work and what impacts on the operations team is crucial for managers and supervisors. In this book the author provides a full explanation of the markets and their impact in operations terms. So if you are about to embark on a career in operations 'Understanding the Markets' is essential reading. Alternatively, if you are planning a career as a dealer it will prove very useful in explaining the process that occurs after you have traded.

The definitive series of professional references for those finance professionals concerned with "Back office" or operations management unique to this industry.Presents concise references on the essential management functions such as technology, client services, and risk management for financial operations management professionals.A comprehensive resource from a leading financial management consultant for global banks and institutions.

Financial Risk Management: A Practical Approach for Emerging Markets (Inter-American Development Bank)

Average customer rating:

Financial Risk Management: A Practical Approach for Emerging Markets (Inter-American Development Bank)
José A. Soler Ramos
Manufacturer: Inter-American Development Bank
ProductGroup: Book
Binding: Paperback

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ASIN: 1886938717

Book Description

This comprehensive guide is designed to help businesses and financial institutions operating in emerging markets incorporate modern risk management techniques into their decisionmaking. It looks at market, credit, operational and legal risks and proposes solutions to risk management issues as they apply specifically to emerging markets.

Based on a value-at-risk approach, the book examines the role of senior management in setting risk guidelines, the use of information systems for monitoring and communicating risk, and the tools for measuring and managing risk. It also outlines how to the implement an objective and systematic risk management program that allows for effective control and evaluation of operations. Drawing on practical methods used by successful risk managers throughout the world, the book provides specific guidance on establishing a modern risk management framework and on efficient approaches to increasing the profitability of risk management activities in emerging market settings.

Originally published in Spanish, Financial Risk Management is already widely used throughout Latin America. But with its emphasis on emerging markets, the book is an invaluable resource for financial risk professionals as well as for all those interested in both the theory and practice of risk management.

Average customer rating:

The unbearable irrelevance of CF in perpetuity
Nice addition to existing literature

Financial Decisions in Emerging Markets
Jaime Sabal
Manufacturer: Oxford University Press, USA
ProductGroup: Book
Binding: Paperback

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ASIN: 0195144597

Book Description

Due to the accelerated global integration that the world has witnessed in recent years, international trade has grown exponentially. As recipients of direct investments from developed nations, emerging countries have benefited enormously from this process. Every sound investment decision demands the application of modern financial theory. However, the theories that are advanced are most often set in the context of developed countries, and do not capture the intricacies of operating in the developing world. Despite the importance of investment flows to developing countries today, it is surprising that so little has been done to adapt financial principles to the special realities of these countries. This book has been written with the objective of filling this void. Financial Decisions in Emerging Markets is the first corporate finance book to take into account the context of emerging markets and the problems they present, including the relative lack of market efficiency. Reviewing financial theory, it focuses on investment and financing decisions as they relate to investors in emerging markets. The objective is to juxtapose the assumptions of financial theory against the realities prevailing in emerging countries and to propose more relevant approaches for investment analysis in these nations. Providing readers with a solid background to evaluate investments in emerging countries, this book is ideal for graduate students taking courses in financial decisions in emerging markets, corporate finance in developing countries, and international corporate finance.

Customer Reviews:

The unbearable irrelevance of CF in perpetuity.......2002-07-21

At the outset, it is important to mention that my special area of interest is cost of capital with finite cash flows (CF). And in my review, it is this point that I would like to address.
In chapter 10, compared to similar books, the author presents a good detailed exposition on the cost of capital. However, my big complaint is that the author assumes that the formulas on the cost of capital that are derived from CF in perpetuity simply carry over to finite CF.
In practice, we derive finite cash flows from financial statements and on grounds of simplicity, one may use the formulas from CF in perpetuity. However, it is not self-evident that the formulas from CF in perpetuity are relevant and appropriate to finite CFs. This may or may not be true, but the equivalence certainly needs to be demonstrated with some simple numerical examples.

Nice addition to existing literature.......2002-05-31

The book deals with the emerging markets' specific problems of investment valuation and financial decisioning. Elementary financial methodologies are modified to capture the different variabeles in emerging markets. It is an easy to read book but I would have liked it to be more in-depth than it is now. It gives, however, a nice structured view on emerging markets valuation theory.

Average customer rating:

Good Book but no answers to Problems

The Capital Budgeting Process
Shahid Ansari
Manufacturer: McGraw-Hill/Irwin
ProductGroup: Book
Binding: Paperback

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Capital Budgeting

ASIN: 007231575X

Customer Reviews:

Good Book but no answers to Problems.......2004-01-07

This is a well laid out book, with very good examples and problems. My reason for giving it a 3 star rating is the absence of answers to numerical problems. I had purchased this book as a self help improvement process in the Capital Budgeting process. But if there are no answers to the problems, than a person does not know how effective was the learning.

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