Investment Decision-making Behavior Under Uncertainty

Investors face different uncertainties when making a project investment. Traditional investment theory paid little attention to uncertainty when comparing the difference between marginal cost and net-present value (NPV) of the forthcoming expected returns that occurred before an investor made an investment decision. If there are strategy uncertainties from opponents, the simple cost-reward rule is not adequate to interpret investor's behavior, thus we must resort to game theory to analyze investors' actions and strategies. When there are exogenously conditional uncertainties determined by natural random selection, it is valuable to recognize the opportunities that accompany risk. Real option theory, which originated from financial option pricing, can explain the relationship between risk and opportunity more clearly than before these theories were formulated. If we want to analyze decision-making where these two uncertainties exist, we can study option exercises through game theory.In game theory, it is common to assume that players are rational and have homogeneous characteristics. Rigorous assumption especially exists in static games: each player perfectly perceives the game structure and the other players' actions, and correctly thinks about the strategies; however, rigorous assumptions are not related to the heterogeneity of players' ability to perceive and think about strategies. Real option theory is a rule; it implies that investors should exercise the option indifferently at a certain time without thinking about the investors' characteristics. In fact, if we observe real investment decision making, there will be significant differences and deviations. In this dissertation, I refine three important characteristics that affect investment decisions from recent studies, including behavior economics, experimental economics, and information economics. I will interpret the function of how these characteristics affect investment decisions. Therefore, we can have a better understanding about investment under uncertainty, and thus we can extend the former theories.As an introduction, chapter 1 consists of the main topic, the dissertation's research paradigm, important concepts, and several relevant theories. In chapter 2, from the perspective of cognitive hierarchy concerning investors' strategic thinking, I will introduce the concept of group perception that discusses how investors' think about other players' characteristics. Through employing an investment game model, I analyze how perception ability affects investment behavior. In chapter 3, based on the theory of time-inconsistent preference, I begin by explaining that preference reversal exists with certainty by setting a model. Furthermore, in the framework of real options, I discuss investment timing selections under both the time-consistent exponential discounting theory and the quasi-hyperbolic discounting theory with discrete time and continuous time separately. In chapter 4, according to the information structure, I extend the option games model to include the investors' incomplete, asymmetric and bounded information. Meanwhile, I argue that the group perception of an information structure also affects investment timing.This dissertation researches investment behavior from the perspective of investors' characteristics. The conclusion proves the function of these characteristics. By extending the former theories, we can interpret investment behaviors more reasonably and predict these behaviors more accurately.