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Optimizing Discount Rates: Expressing Preferences for Sustainable Outcomes in Present Value Calculations

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  • Axelrod, David

Abstract

This paper describes how the discount rate used in present value calculations expresses the preference for sustainability in decision making, and its implication for sustainable economic growth. In essence, the lower the discount rate, the greater the regard for the future, and the more likely we choose behaviors that lead to long-term sustainability. The theoretical framework combines behavioral economics and holonomics, which involve limitations of regard for the future due to constraints on processing uncertainty. An alternative formulation for present value calculations, which includes a survival function, is developed. A taxonomy of institutions based on discount rate is proposed.

Suggested Citation

  • Axelrod, David, 2017. "Optimizing Discount Rates: Expressing Preferences for Sustainable Outcomes in Present Value Calculations," MPRA Paper 84408, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:84408
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    File URL: https://mpra.ub.uni-muenchen.de/84408/1/MPRA_paper_84408.pdf
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    References listed on IDEAS

    as
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    5. Frank, Robert H, 1987. "If Homo Economicus Could Choose His Own Utility Function, Would He Want One with a Conscience?," American Economic Review, American Economic Association, vol. 77(4), pages 593-604, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Discount Rate; Regard; Sustainability; Present Value; Holonomics; Certainty; Behavioral Economics;
    All these keywords.

    JEL classification:

    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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