The standard models of consumer behavior under uncertainty are the expected utility model and the mean-variance model. As with any models involving unobservables one might well ask about the empirical content of these hypotheses: what restrictions on observed behavior do these models impose? How can one test observed behavior for consistency with these models? How can one recover the underlying utility function and forecast behavior in new situations?

Normatively oriented approaches to decision making under uncertainty occupy a major portion of the literature of decision analysis. Among the proposed approaches, the Von Neumann-Morgenstern expected utility (EU) theory has been the most prominent model of rational choice despite some controversies that surround this model with respect to its descriptive ability as well as the plausibility of utility assessment in actual decision situations [6], [10]. Although most applications of the EU model have been concerned with decisions involving monetary outcomes, its scope is not limited to any particular class of consequences. The basic appeal of the model is attributable partly to its generality in this regard, and, more importantly, to the apparent reasonableness of its preferential axioms.

In 1959, Henry Lataná [2] proposed an approximation to the geometric mean that was a simple function of the arithmetic mean and variance, thereby indicating a mathematical relationship between the risky investment choice model of Bernoulli and the Markowitz mean-variance model. In 1969, Young and Trent [4] presented empirical test results of the Latané approximation, as well as a set of other approximations to the geometric mean based on moments, and concluded that the Latane formula yielded a quite accurate approximation to the geometric mean. In Jean's 1980 paper [1] relating the geometric mean model to stochastic dominance models, the infinite series representation of the geometric mean used suggests a more accurate approximation with moments of the geometric mean than that contained in the earlier papers may be possible. Various forms of that series expressed in alternate-origin moments are tested empirically below, and the results confirm that this later series does yield the greatest accuracy of the three approaches.

Numerous studies in recent years have emphasized the importance of accounting properly for abandoment value in capital budgeting (see [1], [4], [7], [10], and [11]). For a variety of reasons, a project need be neither physically exhausted nor have negative cash flows to be abandoned. Robichek and Van Home [10] suggested that a project should be abandoned in any period in which the present value of future cash flows does not exceed its abandonment value. In a modification of this rule, Dyl and Long [4] proposed that the firm give consideration to all possible future abandonment opportunities. They argued that abandonment need not occur at the earliest possible date that the abandonment condition is satisfied, but rather at the date that yields the highest NPV over all future abandonment possibilities. A generalization of these models was offered by Bonini [1], who developed a dynamic programming model to analyze investment projects with abandonment possibilities and uncertain cash flows. More recently, Gaumnitz and Emery [7] compared the abandonment decision to the like-for-like replacement decision and noted that the correct model for a particular case depends on the suitability of the assumptions.

Periods of high mortgage interest rates that characterized the early 1980s have escalated the use of assumption financing in home buying. In these periods, there is an increased demand for alternative sources of financing and a movement away from conventional sources. The purpose of this study is to provide a theoretical and empirical analysis of the effect of the increased use of assumption financing on selling prices of single-family residential housing. Aside from physical characteristics, the financing arranged by the homebuyer is considered a major influence in determining house prices. This is especially true in real estate appraisal practice where differences in types of financing are one of the major categories of adjustment (see [1], [4], and [10]).

The traditional Capital Asset Pricing Model (CAPM) provides a foundation for the estimation of systematic risk that has been applied extensively in studies of investment performance, market efficiency, predictive models, and capital budgeting, to name only a few. Lee [10] considered a special case of nonlinearities occurring in the estimation of systematic risk within the context of the investment horizon problem. His findings, based on a limited sample, provided significant methodological implications for the estimation process and have received wide readership through republication of the study in a readings text [6].

The elimination in 1975 of fixed minimum brokerage commission rates for agency transactions in equity securities was one of the more highly publicized events in the still-ongoing process of the deregulation of American financial markets. While, prior to that time, commission rates on large stock transactions—that were executed primarily for institutions—had become increasingly subject to negotiation, individual investors effectively faced an industry-wide fixed price schedule for the vast majority of their transactions. At the insistence of the Securities and Exchange Commission, the privilege of negotiation on commission rates was extended to securities trades of all sizes as of May 1, 1975, a date the brokerage industry only half-humorously dubbed “Mayday”.

The original Black-Scholes (BS) [2] European call option pricing model does not take account of divided payments on the underlying stock and does not allow for the possibility of early exercise that may be optimal when the stock pays dividends. Black [1] has suggested that the original BS model can be modified to take account of dividends and Sharpe [14] predicts that this modified or pseudo-American BS approach, “while not exact, is probably sufficient for many listed options.”

Recent studies by Fisher and Weil [7], Bierwag [2], [3], Bierwag and Kaufman [5], and Khang [9] demonstrate that it is possible to immunize a portfolio of default-free assets against unexpected interest rate changes so that at the end of the planning period the investor will realize at least the returns expected at purchase. However, this immunization strategy is applicable for the case in which the change in unexpected interest rate occurs only once at the instant after the purchase of the asset. Obviously, the case depicted above is not likely to resemble the real world situation in at least two respects. First, the interest rate change is likely to occur at any time and, second, the interest rate change is likely to occur many times during the investor's planning period.

Recent developments in the literature on bond portfolio management have identified conditions under which uncertainty of the investment return attributable to interest rate changes is eliminated. Such a strategy, called immunization, is achieved when the duration of the bond or portfolio of bonds is equal to the investor's holding period. Duration is defined as a weighted average time to maturity and was originally developed by Macaulay [13]. The condition under which immunization is obtained by setting duration equal to holding period was derived by Redington [14] and Fisher and Weil [10] and further developed by Bierwag and Kaufman [4], Bierwag [2], and Khang [12]. Bierwag [3] has provided a concise summary of the theory of immunization, and Bierwag and Khang [7] show that immunization is equivalent to selecting a strategy in which the worst possible return is maximized, i.e., a minimax strategy. Bierwag [1] examines immunization under multiple shocks to the term structure and Bierwag, Kaufman, and Toevs [6] extend the concept to a general equilibrium, two-state Arrow-Debreu world.

The default of a major corporation or municipality generates debate over the impact these failures have on the borrowing cost of other issuers. Theory suggests that in efficient markets individual failures by themselves should not increase the level of interest rates in a market unless the default provides unanticipated information about other issuers. The default of New York City in the summer of 1975 was believed by many to have provided information that increased the perceived risk of investors and consequently increased new issue borrowing costs in the municipal bond market. Empirical research by Forbes and Peterson [2] and Gramlich [3] supports this contention, reporting that borrowers paid as much as 119 basis points more because of the New York City crisis. A study by Hoffland [6] suggests that the impact of the default was not just temporary, but was felt long after 1975. Though less scientific, others note that during 1975 municipal borrowing costs rose to record high levels with most issues carrying their interest cost during the summer of 1975.

Venture capital companies can be likened to mutual funds that make investments in small, new businesses. However, investments made by venture capitalists are unique in several ways [2]: (1) usually five or more years are required for a new firm to become well enough established that a venture capitalist can liquidate an investment; (2) during the early years of an investment, there is no organized secondary market for its shares; (3) the new firm characteristically faces a high risk of failure; and (4) several infusions of capital are usually required before the new enterprise becomes a going concern. Consequently, the investments made by the venture capital firm have long been considered to carry high risks as well as the potential for high returns. For this reason, venture capital firms actively diversify, investing in a portfolio of individual projects. Thus, the risk and return attributes of the venture capitalist's diversified portfolio will not totally mirror those of its individual investments.