Alessandro Pasti

Why investment decisions still require independent judgement

Investment decisions have never had access to as much information as they do today.

More data.
More sophisticated financial models.
More powerful analytical tools.
And, increasingly, artificial intelligence capable of processing information at a scale and speed unthinkable only a few years ago.

Yet better analysis does not automatically mean better decisions.

Research in behavioural finance and decision science has shown how investment decisions can be affected by overconfidence, confirmation bias, anchoring, group dynamics and escalation of commitment.

This raises a question I find increasingly interesting:

What happens between a good investment analysis and a good capital allocation decision?

A financial model can calculate an IRR.
A valuation can estimate an asset value.
A sensitivity analysis can show what happens when assumptions change.
Due diligence can identify specific risks.

But none of these, individually, answers the ultimate question:

Does this capital decision actually stand up?

That requires something more.

It requires understanding which assumptions drive the investment thesis.
It requires distinguishing facts from estimates and estimates from judgement.
It requires identifying what is known, what remains uncertain and what could materially change the decision.
It requires testing not only the expected return, but also where the investment thesis breaks.

And eventually, it requires judgement.

This is where independent judgement becomes particularly important.

Independence does not mean replacing the investor or systematically opposing a transaction.

It means being able to examine evidence, economics and assumptions without being committed to getting the deal done.

Sometimes the conclusion may be:

Yes.

Sometimes:

Yes, but only under these conditions.

Sometimes:

No.

And sometimes the most rigorous conclusion may simply be:

There is not enough reliable information to make the decision yet.

That last answer matters.

Uncertainty should not automatically be converted into another assumption simply to allow the model to produce a number.

Technology and AI will undoubtedly make investment analysis increasingly powerful.

But I suspect this will make independent judgement more important, not less.

As analytical capabilities increase, the scarce resource may no longer be the ability to produce another model.

It may be the ability to connect evidence, assumptions, economics and risk — and ultimately to take a position on a capital decision while making the reasoning transparent and challengeable.

The investor must always retain the final decision.

But an independent advisor should be prepared to exercise judgement and take responsibility for that judgement.

I am currently studying investment decision-making, capital allocation and independent judgement, with a particular focus on real estate. These Research Notes are part of that ongoing work.

Investment decisions are often assessed through the Base Case.

Does the investment meet the target IRR?
Is the NPV positive?
Does the expected return justify the capital invested?

These are necessary questions.

But they answer only one part of the investment decision.

An investment may meet every required financial criterion in the Base Case and still have very little room for error.

A small increase in CAPEX.
A delay in completion.
A lower exit value.
A higher financing cost.

Any one of these may be enough to push the investment below the investor's required return.

This is why sensitivity analysis should not only ask:

“What happens if this assumption changes?”

It should also ask:

“How far can this assumption change before the investment no longer meets the mandate?”

That point is the breakpoint.

And the distance between the Base Case and that breakpoint tells us something the Base Case alone cannot:

how much room the investment thesis has before it fails.

Performance and robustness are therefore not the same thing.

A strong Base Case can be fragile.

A less spectacular Base Case may prove considerably more resilient.

Understanding that difference can materially improve an investment decision.

This reflection is based on my ongoing work on a Real Estate Investment Decision Framework designed to test investment theses under uncertainty.

Capital expenditure is usually evaluated through the value it is expected to create.

But for long-life assets, this is increasingly only part of the equation.

As regulation, technology, financing conditions and market expectations evolve, some investments become necessary not primarily to create additional value, but to protect existing value.

This is becoming particularly visible in European real estate.

Recent analysis reported by Il Sole 24 Ore suggests that a significant share of the European office stock may require refurbishment in the coming years, with Milan among the most exposed markets.

For asset owners, this changes the investment question.

The relevant comparison is no longer simply:

invest vs. do nothing.

It is:

the cost of investing today vs. the potential cost of not investing.

That second cost may include declining occupancy, weaker rental prospects, refinancing constraints, reduced liquidity, obsolescence and a growing discount in asset value.

This creates a different capital allocation problem.

Not every asset should be refurbished.
Some may justify deep investment.
Some may require limited intervention.
Others may be better repositioned, converted or sold.

The challenge is therefore not simply determining the technical solution.

It is deciding where, when and how much capital should be allocated across competing assets and strategic alternatives.

For owners of long-life assets, defensive CAPEX is becoming an investment decision in its own right.

Because sometimes the return on an investment is not only the value it creates.

It is also the value it prevents from being lost.

Decarbonisation targets are often defined at portfolio level.

Investment decisions are not.

Two assets within the same portfolio may face completely different conditions:

Different remaining useful lives.
Different regulatory exposure.
Different energy intensity.
Different occupancy or utilisation patterns.
Different technological constraints.
And different prospects for long-term value creation.

Applying the same investment logic to every asset may appear consistent.

But consistency is not the same as sound capital allocation.

One asset may justify immediate deep retrofit.
Another may require a staged intervention.
A third may be better suited to operational improvements, repositioning or eventual disposal.

The portfolio target provides direction.

The asset-level strategy determines where, when and how capital should actually be deployed.

Because decarbonisation is achieved across a portfolio.

But value is created — or destroyed — one investment decision at a time.

This reflection is based on my ongoing research into investment decision frameworks for complex infrastructure and non-residential real estate assets.

One of the most underestimated risks in long-term asset management is the assumption that waiting is neutral.

It isn't.

When regulation, technology and market expectations are moving, postponing an investment does not preserve the status quo.

The asset continues to age.
Standards continue to tighten.
The investment window becomes narrower.
And the cost of future adjustment may increase.

This does not mean that investing immediately is always the right decision.

Sometimes waiting is rational.

But waiting should be an explicit investment decision, based on an assessment of risk, timing and future capital requirements — not simply the absence of a decision.

Because in a changing environment, doing nothing is still a capital allocation choice.

And it has a cost.

This reflection is based on my ongoing research into investment decision frameworks for complex infrastructure and non-residential real estate assets.

One of the biggest mistakes in decarbonisation is treating it as an engineering problem.

It isn't.

It is a capital allocation problem.

Every investment in decarbonisation competes with every other use of capital.

Maintenance.
Expansion.
Acquisitions.
Digitalisation.

The real question is not:

"Which technology should we adopt?"

It is:

"Is this the best use of capital for this specific asset, at this specific moment?"

Technology matters.
Timing matters.

Capital allocation determines whether an investment creates value.

Because the objective is not simply to decarbonise assets.

It is to preserve their long-term value.

This reflection is based on my ongoing research into investment decision frameworks for complex infrastructure and non-residential real estate assets.

One of the most common mistakes in capital-intensive sectors is allowing available incentives to drive investment decisions.

Incentives can accelerate investment.

They should never drive it.

When organisations choose projects simply because funding is available, they risk creating fragmented investments, duplicating future CAPEX and weakening long-term asset resilience.

The sequence matters.

First, define the long-term strategy for the asset.

Then evaluate how grants, tax incentives, or other financial instruments can support that strategy.

A funding opportunity should reinforce a sound investment decision.

It should never become the investment strategy itself.

Because incentives are temporary.

Sound capital allocation is not.

This reflection is based on my research into decision frameworks for the decarbonisation of non-residential real estate assets.