The Mechanics of the Weitzman-Gollier Puzzles

Szabolcs Szekeres

MPRA Paper from University Library of Munich, Germany

Abstract: The Weitzman-Gollier Puzzle was observed in a setting of risk neutrality. This paper extends its analysis to cases of constant proportional risk aversion and finds that the phenomenon of the puzzle is not confined to the case of risk neutrality. Weitzman discounting produces declining discount rates for risk aversion values below one, but increasing ones for higher degrees of risk aversion. The finding that Weitzman’s discounting is actually time reversed negative compounding is confirmed. As Weitzman certainty equivalent rates (CERs) pertain to the cost of storing resources, rather than to interest earned from investing them productively, they should not be used in the evaluation of investment projects. Discounting project net benefits with declining discount rates (DDR) is never justified.

Keywords: Discount rate; uncertainty; declining discount rate; negative compounding. (search for similar items in EconPapers)
JEL-codes: D61 H43 (search for similar items in EconPapers)
Date: 2015-05-11
New Economics Papers: this item is included in nep-ppm
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