The real solution of the Weitzman-Gollier Puzzle

Szekeres, Szabolcs (2020): The real solution of the Weitzman-Gollier Puzzle.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Weitzman-Gollier Puzzle; Declining discount rates; Discounting
• Subjects: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation ; Social Discount Rate

References

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