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Foresight as a survival characteristic: when (if ever) does the long view pay?

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Long range RandD and capital investment projects are normally evaluated by means of a procedure (benefit/cost analysis) that involves a choice of time preference functions. Benefit-cost analysts and many economist typically assume that time preference is a behavioral fact of life, and that the time preference function is essentially equivalent to a compound interest law. in practice, they tend to choose discount rates in the range of 3%-8% p.a. in real terms. Variability in projected benefit/cost ratios resulting from this uncertainty is commonly dealt with ad hoc, e.g. by simply presenting results for several different discount rates and letting the "decision-maker" select among them. It is argued in this paper that the basic discounting methodology is fundamentally flawed and can lead to significantly inferior social choices, i.e. choices that would be rejected by virtually any rational actor to whom the choice were fairly presented. A more general methodology is needed

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/Inseadwp1993/93-83.pdf

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Copyright INSEAD. All rights reserved