Investment decisions under uncertainty: The "irreversibility effect"

Abstract

This study proposes an analysis of decision making under conditions of uncertainty and irreversibility, where irreversible decisions significantly reduce future choices. Specifically, the paper examines the highway planning dilemma involving the preservation or destruction of public forests for a circumferential highway around Paris. The author employs an information structure framework to prove that replacing random variables with their expected values leads to more frequent irreversible decisions than optimal, even for risk-neutral decision makers. The “irreversibility effect” is empirically explored, and the magnitude of its impact is assessed. – AI-generated abstract.