Augmented discounting: interaction between ageing and time–preference behaviour

Sozou, Peter D.; Seymour, Robert M.

doi:10.1098/rspb.2003.2344

Cited by 99 publications

(117 citation statements)

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“…Ramsey [27] had introduced discounting, first of all, as a mathematical device ensuring the convergence of infinite horizon cumulative values. Its various explanations supported by empirical studies were proposed afterwards suggesting that humans and animals place less weights on the future then on the present (see discussion in [30]). A reason is that future rewards run more risk of disappearing.…”

Section: Example 1 (Catastrophic Risk Management) the Implications Omentioning

confidence: 99%

“…Accordingly, an animal can be treated as a rational optimizer maximizing its Darwinian fitness, that can be taken to be equivalent to maximizing the expected number of offsprings. In a simple case, fitness is defined [30] then as integral , where is the expected rate of reproductive output at age if the animal survives to that age, and is the probability of surviving to age . It is highly unlikely that an animal is able to learn discount factors (probability density ) in order to maximize the Darwinian fitness.…”

Section: Example 1 (Catastrophic Risk Management) the Implications Omentioning

confidence: 99%

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Induced Discounting and Risk Management

Ermolieva

Ermoliev

Fischer

et al. 2009

Lecture Notes in Economics and Mathematical Systems

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ForewordDiscounting is a key element of catastrophic risk management. Misperceptions of discount rates result in inadequate evaluations of risk management strategies, which in turn may provoke catastrophes and significantly contribute to increasing vulnerability of the society. Therefore applications of the traditional discounting negatively affect the outcome of catastrophic risk management. This paper analyses the implication of potential catastrophic events on the choice of discounting. It provides fundamental insights in the nature of discounting that is critically important for developing robust strategies for managing catastrophic risks.It shows that any discounting with constant or declining rates can be linked to random "stopping time" events, which define the internal discount-related horizons of evaluations. Conversely, any random stopping time horizon induces a discounting, in particular, with the standard discount rates.The expected duration of the stopping time horizon for discount rates obtained from capital markets does not exceed a few decades and, as such, these rates may significantly underestimate the net benefit of long-term decisions. The proposed alternative undiscounted stopping time criterion allows to induce social discounting focusing on arrival times of potential extreme events rather then horizons of market interests. It depends also on feasible decisions and spatio-temporal variability of catastrophic losses.ii AbstractThe goal of this paper is to specify and summarize assumptions and proofs for new approaches to discounting proposed in our catastrophic risk management studies. The main issue is concerned with justification of investments, which may turn into benefits over long and uncertain time horizon. For example, how can we justify mitigation efforts for expected 300-year flood that can occur also next year. The discounting is supposed to impose time preferences to resolve this issue, but this view may be dramatically misleading. We show that any discounted infinite horizon sum of values can be equivalently replaced by undiscounted sum of the same values with random finite time horizon. The expected duration of this stopping time horizon for standard discount rates obtained from capital markets does not exceed a few decades and therefore such rates may significantly underestimate the net benefits of long-term decisions.The alternative undiscounted random stopping time criterion allows to induce social stopping time discounting focusing on arrival times of potential extreme events rather then horizons of market interests. In general, induced discount rates are conditional on the degree of social commitment to mitigate risk. Random extreme events affect these rates, which alter the optimal mitigation efforts that, in turn, change events. This endogeneity of the induced discounting restricts exact evaluations necessary for using traditional deterministic methods and it calls for stochastic optimisation methods. The paper provides insights in the nature of discounting that are criti...

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Section: Example 1 (Catastrophic Risk Management) the Implications Omentioning

confidence: 99%

Section: Example 1 (Catastrophic Risk Management) the Implications Omentioning

confidence: 99%

Induced Discounting and Risk Management

Ermolieva

Ermoliev

Fischer

et al. 2009

Lecture Notes in Economics and Mathematical Systems

View full text Add to dashboard Cite

show abstract

“…The essence of the above point -that the optimal discounting strategy when the true rate is uncertain is to employ a time-decreasing rate -has been noted in the economics literature (Sozou and Seymour 2003;Weitzman 2001). Weitzman (2001) documents in detail the divergence of expert opinion on appropriate social discount rates, arguing that timedecreasing rates should therefore be adopted, a position that is beginning to win adherents.…”

Section: But Isn't Hyperbolic Discounting Irrational?mentioning

confidence: 99%

“…The social risk must be smaller than the individual, since any event affecting society necessarily affects all members while the reverse is not true. Individuals discounting for risk-avoidance reasons would be expected to discount at a rate at least equal to the reciprocal of their expected lifespan, and indeed do so (Sozou and Seymour 2003). Past societies have greatly outlived their individual members, even if one defines societies narrowly; it would be wrong to discount common assets at high, individual rate if one hopes that the society will last many human lifetimes.…”

Section: Social Discounting and Riskmentioning

confidence: 99%

Discounting and uncertainty: a non-economist’s view

Sherwood

2007

Climatic Change

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When asked to choose between immediate and delayed rewards or costs, both human and (other) animal respondents will equate a small reward sooner with a larger one later. This is the well-known phenomenon of individual "discounting". The capital interest rates that prevail in market economies are a related phenomenon.Most economists agree that "social" discounting should be applied to compare costs and benefits that accrue to society at different times due to, for example, actions to reduce environmental degradation. They cannot agree, however, on appropriate rates to use. This is important since the policy implications tend to hinge on the assumed rate, as benefits often lag investment costs by times that can exceed 1=% for plausible discount rates %. A high discounting rate makes investments (for example, intervention to reduce future climate change) appear unattractive if rewards do not accrue very quickly, even if they eventually far exceed costs. This may seem unjust or unethical. Omitting discounting, on the other hand, can indicate that we should be engaged in radically large investments. Much discourse has ensued over discounting, often pitting economists against others. However, as long as comprehensive cost-benefit analysis is to be attempted, discounting or something equivalent cannot be avoided. A recent review of the economics literature (Spackman 2004) discusses discounting justifications and the many controversies surrounding them.

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“…Previous evolutionary explanations of impulsiveness focus on economic discounting in one form or another. For example, a relatively small number of authors (Rogers 1994;Sozou & Seymour 2003) develop life-history-style explanations that derive discount rates from mortality and fecundity schedules. In this approach, impulsiveness occurs because more immediate rewards lead to more offspring; while this is undoubtedly correct and important, it seems unlikely to explain impulsive choice in the range of seconds or even tens of seconds.…”

Section: (C) Related Models and Limitationsmentioning

confidence: 99%

Impulsiveness without discounting: the ecological rationality hypothesis

Stephens

Kerr

Fernández‐Juricic

2004

Proc. R. Soc. Lond. B

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Observed animal impulsiveness challenges ideas from foraging theory about the fitness value of food rewards, and may play a role in important behavioural phenomena such as cooperation and addiction. Behavioural ecologists usually invoke temporal discounting to explain the evolution of animal impulsiveness. According to the discounting hypothesis, delay reduces the fitness value of the delayed food. We develop an alternative model for the evolution of impulsiveness that does not require discounting. We show that impulsive or short-sighted rules can maximize long-term rates of food intake. The advantages of impulsive rules come from two sources. First, naturally occurring choices have a foreground-background structure that reduces the long-term cost of impulsiveness. Second, impulsive rules have a discrimination advantage because they tend to compare smaller quantities. Discounting contributes little to this result. Although we find that impulsive rules are optimal in a simple foreground-background choice situation in the absence of discounting, in contrast we do not find comparable impulsiveness in binary choice situations even when there is strong discounting.

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Augmented discounting: interaction between ageing and time–preference behaviour

Cited by 99 publications

References 20 publications

Induced Discounting and Risk Management

Induced Discounting and Risk Management

Discounting and uncertainty: a non-economist’s view

Impulsiveness without discounting: the ecological rationality hypothesis

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