Accounting for ex post regret in evaluating sustainable actions

Jiakun Zheng
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Jiakun Zheng: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: We characterize socially efficient discount rates within a regret-minimization framework that accounts for the possibility that public investment decisions may prove ex post suboptimal. We first establish a dichotomy in the effects of regret-risk aversion on discounting. Specifically, socially efficient discount rates coincide, to a first-order approximation, with those under discounted utility when regret-risk aversion is finite, but this equivalence breaks down under Savage's minimax regret criterion, the limiting case of infinite regret-risk aversion. Under minimax regret, the stochastic discount factor remains unchanged, but future payoffs are evaluated using a regret-induced probability measure that assigns equal weight to the best and worst feasible consumption-growth paths. When log consumption growth is i.i.d. and bounded, minimax regret yields lower risk-free social discount rates with a downward-sloping term structure and higher aggregate risk premia with an upward-sloping term structure. Our findings provide a behavioral rationale for declining long-run social discount rates and offer a simple rule of thumb for evaluating long-lived projects under deep uncertainty.

Keywords: uncertainty; robust decisions; minimax regret; net present value; social discounting (search for similar items in EconPapers)
Date: 2026-08
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