Use of intervals and possibility distributions in economic analysis

Traditional approaches to capital budgeting are based on the premise that probability theory is necessary and sufficient to deal with the uncertainty and imprecision which underlie the estimates of required parameters. This paper argues that, in many circumstances, this premise is invalid since the principal sources of uncertainty are often non-random in nature and relate to the fuzziness rather than the frequency of data. To capture and quantify correctly the underlying uncertainty present in non-statistical situations, this paper suggests two alternative representations: interval analysis and possibility distributions. The use of these representations in economic analysis is discussed, and their application is illustrated through numerical examples.