Robust Irreversible Investment
DFG-Projekt Ri 1128-3-1
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Abstract
Investments in new projects are often irreversible. It is, for example, very difficult to withdraw at low cost from an investment project when it involves the building of new factories, the acquisition or yet the development of machinery or the financing of research.
Furthermore, investments in new projects are likely to be uncertain. The presence of uncertainty doesn`t only indicate the fact that the return on the investment is partly random, but also encompasses the fundamental difficulty of forecasting the probability distribution. The investment plan necessary to classify different projects must therefore be robust in the sense that it will remain valid for a whole class of potential distributions.
The aim of this project is to develop a theory of optimal investment that
is relevant to cases where projects are irreversible and where profits are
uncertain.