Investment Under Uncertainty Investment Under Uncertainty (Princeton U. press, 1994) Avinash Dixit and Robert Pindyck (Princeton U. press, 1994) Chapter 1 A New View of Investment Economics defines investment as the act of incurring an immediate cost in the expectation of future rewards. Firms that construct plants and install equipment, merchants who lay in a stock of goods for sale, and persons who spend time on vocational education are all investors in this sense. Somewhat less obviously, a firm that shuts down a loss-making plant is also "investing": the payments it must make to extract itself from contractual commitments, including severance payments to labor, are the initial expenditure, and the prospective reward is the reduction in future losses. Viewed from this perspective, investment decisions are ubiquitous. Your purchase of this book was an investment. The reward, we hope, will be an improved understanding of investment decisions if you are an economist, and an improved ability to make such decisions in the course of your future career if you are a business school student. Most investment decisions share three important characteristics it varying degrees. First, the in

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