Why is investment spending a highly volatile component?

Several factors influence how much businesses want to invest. These include interest rates, tax provisions, technical change, and the strength of the economy. Sometimes these determinants change abruptly, leading to dramatic variations in investment. But perhaps the most important factor accounting for the volatility of investment spending is the state of business confidence, which in turn depends on expectations about the future. Although confidence is tricky to measure, it does seem obvious that businesses will build more factories and purchase more new machines when they are optimistic. Correspondingly, their investment plans will be very cautious if the economic outlook appears bleak.