Increasingly, institutional investors must respond to a complex set of internal and external pressures for investment decisions that align with ethical principles, promote intergenerational equity and create positive social and economic impacts for communities.

This book provides an analytical frame for explaining how investors make decisions in increasingly complex and interdependent global financial markets. It argues that ambiguity is both the cause of and the solution to poor investment decision-making. This perspective rests on the view that ambiguity is conceptually distinct from uncertainty. Unlike uncertainty, ambiguity is not a problem of missing information; it is a problem of interpretation. I show that finance theory conflates ambiguity with uncertainty. In doing so, finance theory maintains that the world can be carved up into events that are characterized by risk and by uncertainty that can be reduced to risk. But such a perspective ignores the impact of increasing linkages between issues such as resource scarcity, climate change, physical infrastructure and technological innovations on an investor’s ability to manage risk. Understanding ambiguity is critical to managing the growing number of risks that cannot be traced to their direct causes.

The primary aim of this book is to explain how ambiguity affects finance theory and practice. A second aim is to explore how investors can manage ambiguity. My focus is on institutional investors that occupy an increasingly important space in global financial markets. A third aim is to identify the constructive properties of ambiguity in the design of governance systems that work with human nature, rather than against it. While its applications are broad, the book is bound by a commitment to work out the concept of ambiguity from first principles. The book stands out in a discipline where so much emphasis is placed on how to access information, and so little emphasis on how to understand, communicate and interpret information.