The real solution of the Weitzman-Gollier Puzzle

Szabolcs Szekeres

MPRA Paper from University Library of Munich, Germany

Abstract: The Weitzman-Gollier Puzzle centered on the question of whether certainty equivalent discount rates should be growing or declining functions of time in capital markets with perfectly autocorrelated stochastic interest rates. Absent a convincing solution of the puzzle in the context of risk neutrality, most of the literature trying to reconcile the two approaches appealed to the notion of risk-aversion, and many claim having solved the puzzle while endorsing the notion of declining discount rates (DDRs). This note proves that the DDR recommendation results from the fallacy of ignoring that the expectation of the inverses is not equal to the inverse of the expectation and shows how incorrect CERs can be computed from correct ones and vice versa. Consequently, the Weitzman-Gollier Puzzle is not a puzzle, but an insidious, long undetected mistake.

Keywords: Weitzman-Gollier Puzzle; Declining discount rates; Discounting (search for similar items in EconPapers)
JEL-codes: D61 H43 (search for similar items in EconPapers)
Date: 2020-08-10
New Economics Papers: this item is included in nep-ene and nep-ore
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