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The Mechanics of the Weitzman-Gollier Puzzles

Szekeres, Szabolcs (2015): The Mechanics of the Weitzman-Gollier Puzzles.

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Abstract

The Weitzman-Gollier Puzzle was observed in a setting of risk neutrality. This paper extends its analysis to cases of constant proportional risk aversion and finds that the phenomenon of the puzzle is not confined to the case of risk neutrality. Weitzman discounting produces declining discount rates for risk aversion values below one, but increasing ones for higher degrees of risk aversion. The finding that Weitzman’s discounting is actually time reversed negative compounding is confirmed. As Weitzman certainty equivalent rates (CERs) pertain to the cost of storing resources, rather than to interest earned from investing them productively, they should not be used in the evaluation of investment projects. Discounting project net benefits with declining discount rates (DDR) is never justified.

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