Extreme events, discounting and stochastic optimization

Yuri Ermoliev (), Tatiana Ermolieva (), Guenther Fischer () and Marek Makowski ()

Annals of Operations Research, 2010, vol. 177, issue 1, 9-19

Abstract: The paper analyzes the implications of extreme events on the proper choice of discounting. Any discounting with constant or declining rates can be linked to random “stopping time” events, which define the internal discount-related horizons of evaluations. Conversely, any stopping time induces a discounting, in particular, with the standard discount rates. The expected duration of the stopping time horizon for discount rates obtained from capital markets does not exceed a few decades and, as such, these rates may significantly underestimate the net benefits of long-term decisions. The alternative undiscounted stopping time criterion allows to induce social discounting focusing on arrival times of potential extreme events rather then horizons of market interests. Induced discount rates are conditional on the degree of social commitment to mitigate risk. In general, extreme events affect these rates, which alter the optimal mitigation efforts that, in turn, change events. The use of undiscounted stopping time criteria requires stochastic optimisation methods. Copyright Springer Science+Business Media, LLC 2010

Keywords: Extreme events; Stopping time; Catastrophic risks; Discounting; Investments; Stochastic optimisation (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10479-009-0606-4 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:177:y:2010:i:1:p:9-19:10.1007/s10479-009-0606-4

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-009-0606-4

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().