Do economists actually use discount rates to account for uncertainty? My understanding was that we are discounting expected utilities, so uncertainty should be accounted for in those expected utilities themselves.
Maybe it’s easier to account for uncertainty via an increasing discount rate, but an exponential discount rate seems inappropriate. For starters I would think our degree of uncertainty would moderate over time (e.g. we may be a lot more uncertain about effects ten years from now than today, but I doubt we are much more uncertain about effects 1,000,010 years from now compared to 1,000,000 or even 500,000 years from now).
If you think that the risk of extinction in any year is a constant γ, then the risk of extinction by year t is γt, so that makes it the only principled discount rate. If you think the risk of extinction is time-varying, then you should do something else. I imagine that a hyperbolic discount rate or something else would be fine, but I don’t think it would change the results very much (you would just have another small number as the break-even discount rate).
I think there’s a non-negligible chance we survive until the heat death of the sun or whatever, maybe even after, which is not well-modelled by any of this.
The reason it seems reasonable to view the future 1,000,010 years as almost exactly as uncertain as 1,000,000 years is mostly myopia. To analogize, is the ground 1,000 miles west of me more or less uneven than the ground 10 miles west of me? Maybe, maybe not—but I have a better idea of what the near-surroundings are, so it seems more known. For the long term future, we don’t have much confidence in our projections of either a million or a million an ten years, but it seems hard to understand why all the relevant uncertainties will simply go away, other than simply not being able to have any degree of resolution due to distance. (Unless we’re extinct, in which case, yeah.)
Do economists actually use discount rates to account for uncertainty? My understanding was that we are discounting expected utilities, so uncertainty should be accounted for in those expected utilities themselves.
Maybe it’s easier to account for uncertainty via an increasing discount rate, but an exponential discount rate seems inappropriate. For starters I would think our degree of uncertainty would moderate over time (e.g. we may be a lot more uncertain about effects ten years from now than today, but I doubt we are much more uncertain about effects 1,000,010 years from now compared to 1,000,000 or even 500,000 years from now).
If you think that the risk of extinction in any year is a constant γ, then the risk of extinction by year t is γt, so that makes it the only principled discount rate. If you think the risk of extinction is time-varying, then you should do something else. I imagine that a hyperbolic discount rate or something else would be fine, but I don’t think it would change the results very much (you would just have another small number as the break-even discount rate).
I think there’s a non-negligible chance we survive until the heat death of the sun or whatever, maybe even after, which is not well-modelled by any of this.
The reason it seems reasonable to view the future 1,000,010 years as almost exactly as uncertain as 1,000,000 years is mostly myopia. To analogize, is the ground 1,000 miles west of me more or less uneven than the ground 10 miles west of me? Maybe, maybe not—but I have a better idea of what the near-surroundings are, so it seems more known. For the long term future, we don’t have much confidence in our projections of either a million or a million an ten years, but it seems hard to understand why all the relevant uncertainties will simply go away, other than simply not being able to have any degree of resolution due to distance. (Unless we’re extinct, in which case, yeah.)