Framework for investment decision making

A study has been conducted to investigate current practices on decision-making under risk and uncertainty for infrastructure project investments. It was found that many European countries including Australia, the U.K., France, and Germany use scenarios for the investigation of the effects of risk and uncertainty of project investments. Different alternative scenarios are mostly considered during the economic cost-benefit analysis stage. For instance, the World Bank requires an analysis of risks in all project appraisals. Risk in economic evaluation needs to be addressed by calculating the sensitivity of the rate of return for a number of events. Risks and uncertainties of project developments arise from various sources of errors including data, model and forecasting errors. It was found that the most influential factors affecting risk and uncertainty resulted from forecasting errors. Data errors and model errors have trivial effects. It was argued by many analysts that scenarios do not forecast what will happen but scenarios indicate only what can happen from given alternatives. It was suggested that the probability distributions of end-products of the project appraisal, such as cost-benefit ratios that take forecasting errors into account, are feasible decision tools for economic evaluation. Political, social, environmental as well as economic and other related risk issues have been addressed and included in decision-making frameworks, such as in a multi-criteria decision-making framework. But no suggestion has been made on how to incorporate risk into the investment decision-making process.