Capital and Uncertainty – How Large Capital Investment Decisions are made within a Firm

Abstract

If only we knew more about the determinants of Investment" asked Trygve Haavelmo in 1960.  Now, 59 years later, this same question could still validly be asked.  It has been recognized that large capital investment decisions within firms are only rarely profit maximizing under the traditional neoclassical definitions, and that "agency" issues are only a partial explanation for this.  From macroeconomists at the various central banks trying to promote more investment in an economy by lowering interest rates to record (low) levels, to the boards of large corporations wrestling with decisions to start-up new projects, the experience and success of the various choices and actions has been a luke-warm one at best.

The seminar looks at some of the classic treatment of capital and capital investment choices in the economics literature, and in real case studies from the infrastructure, transport, and mining industries.  It highlights short-comings in the treatment of the choice in comparison to consumer choice and comparison to neoclassical treatment of choice and value under uncertainty.  It presents the capital investment choice problem as a process, with resolution of uncertainty endogenous to the process.  The model promises significant advancement in the way capital investment alternatives are understood and in the way decisions are made within firms and in the economy generally.

About the presenter’s visit

Ian Runge is an Adjunct Professor in the School of Mining and Metallurgical Engineering, and Industry Fellow in the School of Economics at University of Queensland.  He is the founder of Brisbane-based RPMGlobal Holdings Ltd - the world's largest publicly traded mining technology firm, listed on the ASX in May 2008, with offices in 20 locations and 11 countries, and operating in more than 120 countries.  He is also author of the textbook "Mining Economics and Strategy" the biggest selling mining textbook, published originally in 1998 and currently being updated.  Whilst at UQ, Dr. Runge is located in Room 634 Colin Clark Building, and may be contacted at irunge@runge.com.