Investment Decisions under Uncertainty and Variability — Some Practical Experiences of Using Forecasts and Probabilities

Abstract

This paper illustrates by three practical examples the use of forecasts and probabilities in making actual investment decisions. In each case the use of a simple forecast would lead to a wrong decision. The emphasis throughout is on the interaction between management and the operational research scientist. The three examples discussed in the paper are: (a) Study of future production capacity, where future demand is uncertain; (b) Study of storage facilities, where demand is variable and there is a risk of losing custom; (c) Study of future pipe-line capacity, where throughput is variable and there was uncertainty when to invest. The paper concludes with a discussion on the effects of variability, uncertainty and risk on the decision criterion, and on the decisions made.