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Can we use human judgments to determine the discount rate?

J Baron1

  • 1Department of Psychology, University of Pennsylvania, Philadelphia 19104-6196, USA. baron@psych.upenn.edu

Risk Analysis : an Official Publication of the Society for Risk Analysis
|April 21, 2001
PubMed
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Human judgments on discount rates for environmental goods are inconsistent. This challenges using these judgments for cost-benefit analyses, suggesting a need for revised methods in environmental economics.

Area of Science:

  • Environmental Economics
  • Behavioral Economics
  • Decision Science

Background:

  • Long-term discount rates for environmental goods are crucial for cost-benefit analyses.
  • A common justification for specific discount rate structures is based on human judgment.
  • Previous research suggests discount rates should decrease with longer delays.

Purpose of the Study:

  • To investigate the internal consistency of human judgments regarding long-term discount rates.
  • To evaluate the reliability of human judgments as a basis for environmental cost-benefit analyses.

Main Methods:

  • An experiment was designed to elicit and analyze human judgments on discount rates across varying delay periods.
  • Participants' responses were analyzed for consistency in their stated discount rate preferences.

Related Experiment Videos

Main Results:

  • Experimental findings revealed significant internal inconsistencies in participants' judgments of discount rates.
  • These inconsistencies were observed even when considering the same environmental goods across different time horizons.

Conclusions:

  • Human judgments on discount rates are not consistently applied, questioning their suitability for determining environmental discount rates.
  • The findings highlight potential flaws in using judgment referenda for cost-benefit analyses, necessitating a re-evaluation of current methodologies.