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"Two key aspects of the investment decisions of firms are that they are undertaken in a cloud of uncertainty, and that investment spending over the business cycle is highly volatile. Concentrating on the investment decision as the balance between the return and the cost of the investment does little towards a useful economic explanation". Examine q-theory and other theories of investment. How well do they explain investment decisions? Most of the literature that focuses on the behaviour of investment either tends to focus on the relationship between the return and cost of capital or the relationship between investment and output. With regard to the former, the most basic neoclassical theory looks at investment decisions under a situation of perfect competition. There is no uncertainty, a perfect elastic supply of capital goods and the firm can adjust their capital stocks costlessly. If these assumptions hold the firms profits can be...

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