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The real solution of the Weitzman-Gollier Puzzle

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  • Szekeres, Szabolcs

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.

Suggested Citation

  • Szekeres, Szabolcs, 2020. "The real solution of the Weitzman-Gollier Puzzle," MPRA Paper 102344, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102344
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    References listed on IDEAS

    as
    1. Christian Gollier & Phoebe Koundouri & Theologos Pantelidis, 2008. "Declining discount rates: Economic justifications and implications for long-run policy [‘Regime switches in interest rates’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 758-795.
    2. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
    3. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
    4. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    5. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    6. Pazner, Elisha A & Razin, Assaf, 1975. "On Expected Value vs. Expected Future Value," Journal of Finance, American Finance Association, vol. 30(3), pages 875-877, June.
    7. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    8. Szekeres, Szabolcs, 2018. "Why expected discount factors yield incorrect expected present values," MPRA Paper 91187, University Library of Munich, Germany, revised 02 Jan 2019.
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    More about this item

    Keywords

    Weitzman-Gollier Puzzle; Declining discount rates; Discounting;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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