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An analysis of risky financial decisions
Author(s) -
Mehrez A.,
Regev U.,
Spivak A.
Publication year - 1984
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090050105
Subject(s) - constraint (computer aided design) , utility maximization , maximization , expected utility hypothesis , economics , microeconomics , actuarial science , econometrics , finance , mathematical economics , mathematics , geometry
A problem of financing uncertain cost of a project is investigated. The paper analyses the allocation and the loss due to the cost uncertainty. Different formulations of the problem are suggested and compared: expected profits, chance constraint maximization and a utility approach. It is shown that even a risk‐neutral manager is willing to pay a premium to reduce uncertainty. The two approaches to risk, chance constraint versus concave utility, are shown to be non‐equivalent.