The response of firm s rivals may also be uncertain. High uncertainty means that investors and entrepreneurs cannot confidently predict what the company will look like in the future. Uncertainty affects the willingness of investors to contribute capital, the desire of suppliers to extend credit, and the decisions of firms managers. If managers are adverse to taking risks, it may be difficult to induce them to make the right decisions. Conversely, if entrepreneurs are overoptimistic, then investors want to curtail various actions.
Uncertainty also affects the timing of investment.
Investors need to know how information-gathering activities can address these concerns and when they should be undertaken. The second factor, asymmetric information, is distinct from uncertainty. Various problems develop in settings where asymmetric information is prevalent. The entrepreneur might also invest in projects that build up his reputation at the investors expense. Asymmetric information can also lead to selection problems.