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

Axelrod, David (2017): Optimizing Discount Rates: Expressing Preferences for Sustainable Outcomes in Present Value Calculations. Published in: Journal of Applied Business and Economics , Vol. 19, No. 1 (2017): pp. 9-19.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Discount Rate, Regard, Sustainability, Present Value, Holonomics, Certainty, Behavioral Economics
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B59 - Other; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; D - Microeconomics > D9 - Intertemporal Choice

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