Uncertainty

The principal questions of investment appraisal are what to build where and how much to spend. Answering these questions within the expected utility paradigm of risk and uncertainty has led to the development of the risk management industry with a sophisticated toolbox at its disposal. Yet these tools have been found wanting in investment appraisal where projects continually overrun their schedules and budgets, and fail to deliver the expected outcomes. This chapter will emphasize the fundamental importance of uncertainty in complex project organizing, rather than risk. We first discuss the genesis of the expected utility paradigm before identifying some of its weaknesses. We then discuss the cognitive perspective derived from the work of Knight and Keynes and its rather different definition of uncertainty, and attempt to assess whether these can provide the basis for a different approach to investment appraisal appropriate for addressing the grand challenges of the 21st century.