MODELING ENTREPRENEURIAL INVESTMENT DECISIONS IN THE CYBERSECURITY SPHERE UNDER AMBIGUITY

Abstract

Most economic decisions are made under uncertainty, and decision-makers, particularly entrepreneurs are conscious of external factors that affect their decisions yet are out of their control. However, making the best predictions, these factors or variables will determine the effectiveness of their decisions, which are also influenced by political, environmental, technological and other developments during the course of the investment. In this context, given the high-level uncertainty in the cyber environment and the stochastic nature of cyber threats, it is essential to analyze the uncertain and unpredictable market conditions, study the factors, affecting irreversible investments and define the optimal timing of investment decisions. The standard investment models presuppose that the entrepreneur has an extreme aversion to uncertainty, i.e., mostly considering the worst-case scenarios without ambiguity. This article presents an entrepreneurial investment decision-making model and demonstrates the significance of an entrepreneur's attitude towards Knightian uncertainty (ambiguity) when making investment decisions in the field of cyber security. The model introduces both complete ambiguity-aversion and ambiguity-loving cases․ The numerical example demonstrates the effects of changes in the perceived level of ambiguity and the entrepreneur’s attitude toward ambiguity on the expected value of an investment project. Accordingly, the entrepreneur invests if and only if the expected profit level exceeds the critical level of current profits (threshold), otherwise the investment will not be undertaken.