Investment Under Uncertainty

by Robert S. Pindyck and Avinash K. Dixit

Book Overview

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,...

• Format: Hardcover
• Language: English
• ISBN: 0691034109
• ISBN13: 9780691034102
• Release Date: January 1994
• Publisher: Princeton University Press
• Length: 488 Pages
• Weight: 1.97 lbs.
• Dimensions: 1.4" x 6.4" x 9.6"

Customer Reviews

An excelent book!

For anyone interested (seriously) in investment under uncertainty (aren't most of the investments such) this is a must have. But a few words of caution though. The book is not easy to read and follow if you don't have working knowledge of calculus, differential equations, numerical analysis (finite differences) and probability theory to a lesser degree. The book actually summarizes the field of investment under uncertainty up to the point when it was written (early 90s): basically it collects journal articles published in this area and organizes then in logical manner. But it also does more than just collecting articles: it emphasizes important points in each of them and omits irrelevant ones. It also adds important segments to bridge the gap between the articles. In the first few chapters authors give mathematical preliminaries (in my opinion you should look elsewhere if the maths is unknown to you but once you get the hold of it, you will appreciate their exposition as it is very concise and relevant to the issues in the book). In the rest of the chapters authors build the idea of investment under uncertainty starting with simple and moving on to more complicated examples. So who could use this book? Besides academics, people working on investment analysis in capital intensive industries (energy, RnD, real estate, etc - engineers might find this book very useful: Pindyck by the way has a degree in electrical engineering and Dixit in math). Coming from the energy sector I always felt something was wrong with traditional NPV analysis. Now I know what the solution is: use real options. Overall, the book is worth every second you invest in it.

Fabulous Text on Real Options

Let me start off by saying that this is an excellent book. The authors are very clear writers and the text is easy to follow. I think there are two types of readers that can benefit from reading this book. First, anyone that wants to learn about real options, especially the theory behind it should read this book. Dixit and Pindyck do a wonderful job explaining the different options embedded in real projects. Second, anyone that wants to learn how to use dynamic programming or contingent claims analysis to solve real options problems should read this book. In my opinion, Dixit and Pindyck have the best explanation of what to expect and how to solve the common specifications found in real options problems. They show problems that make use of different stochastic processes, such as geometric Brownian motions, mean reverting processes, or Poisson jump processes, and show how some of these can be solved analytically. Other books do not delve into a lot of detail on finding analytical solutions to the problems and merely assume that readers would be able to figure out their calculations. In addition, there is a short section (might even have been an appendix) that briefly discusses how numerical solutions work. After reading a number of real options texts available in the market, I am glad that I still took the time to read this book. This is probably the most important real options book out there. Although I think every one interested in real options should read this, I think the ones that are particularly interested in more applied real options are better served by a book like Copeland and Antikarov's Real Options book and Copeland's Valuation book. These books are more geared towards solving valuation problems using binomial trees, which for practical purposes would most likely be the approach used (as most real world problems would probably need numerical solutions anyway).

dealing with uncertainty

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

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. It is a mathematical subject...and to those with a good mathematical background, the book is remarkably well-organized and easy to understand. I found this book to be very helpful in my research.

A born classic book!

A lifetime book, a must for people interested in the modern "real options approach". Thorough and very didatic book, the maths level is far easier than Duffie's books, for instance. Requires differential calculus but at undergraduated engineering level. Previous knowledge of stochastic calculus and optimization under uncertainty are not required because there are two excellent chapters where the authors explain these tools in a concise format. For serious students, researchers and practitioners in capital budgeting, financial economics and investment theory. Comprehensive industrial applications models of practical importance, with several numerical results throughout charts and tables, makes this book valuable for capital budgeting consultants. In textbook format, for people interested in a deep understanding of the models, not only in rules of the thumb or ease advices. The best choice for graduated level courses, but some chapters also can be used for MBA courses, at least as complementary text. A born classic book!