Discounting and the

Optimists Paradox
Dr. Ashir Mehta

Why discount.
Economists discount any future benefit when

comparing it to a current benefit

Simple discount rates consider just time
preference preference for a benefit today
versus later
Social discount rates more complex ethical
aspects of a difficult choice consumption now
versus later, for society rather than individual
Crucial importance of choice of discount rates
in long-term decisions biggest uncertainty of
all in economics

Critique
ethically

indefensible, yet discount because

assumption that todays investments and
technical change will produce economic growth.
Our descendents will be richer than we are will
have more cars than us
MU, incremental satisfaction from additional
cars will be lower and lower
Discounting at the rate at which MU decreases
ethically justified
Growth is the reason for undervaluing future
consumption and enjoyments diminishing
utility of future growth

Critique..
Yet

is it also reason to undervalue future needs for

environmental goods and services? irreversible events
theme parks vs. tigers growth will not reverse
environmental damage
Discounting gives rise to optimists paradox
Assumption of future economic growth (GDP) justifies using
more resources and polluting more NOW than otherwise due
to decreasing MU of consumption as growth occurs [present
growth gives more utility than future growth]
Our descendents who are supposed to be better off than us
will be paradoxically worse off from the environmental point
of view than we are.
Thus, discounting actually makes society environmentally
worse off ..
---------------------------------