Summary
In response to the limitation of static (exponential) discount rates, we suggest dynamic (hyperbolic) discount rates that decline over time. This helps reflect the inherent uncertainty around economic growth, investment performance and even discount rates themselves (which becomes exponentially more material as the time horizon for analysis is extended), as well as the temporal aspect of where value is realised. Negative adjustments to the existing discount rate may also be justified to capture long-term value creation beyond the investment time horizon and provide more accurate analyses of the future value of long-term investments.
Next, we set out our second solution to monological discounting: pluralistic discounting.
Pluralistic Discounting
A multivocality approach enables a broader range of factors to be considered material beyond the purely financial. In this context, to address the monological approach to discounting investments with a singular financial perspective, other capital specific rates could be applied, recognising the differing growth, depreciation and replenishment rates, as well as other varying and unique characteristics. This approach highlights the inherent differences across goods and services, driven by their composition of diverse forms of capital. Each type of capital form has unique characteristics, such as varying rates of growth, depreciation, and regeneration, influencing how they contribute to production. As a result, these differences require tailored discounting approaches, referred to here as pluralistic discounting , particularly for projects involving non-market contributions such as natural resources. Costanza’s core justification for adopting a pluralistic discounting approach is due to differing growth and depreciation rates, acknowledging that various scholars have put forward this idea, including Traeger 78 who proposed it is suboptimal to use the same discount rate for all goods and services if they grow and fall at different rates. Fisher and Krutilla also note that a “result that may be interpreted as different effective discount rates applied to the benefit streams from alternative uses of natural environments does emerge from our analysis. ” 79 An informative analogy comes from factor-based risk models in finance, where exposures are decomposed into macroeconomic, sectoral, and idiosyncratic drivers rather than compressed into a single risk term. These models disaggregate risk into recognisable factors, such as GDP growth, inflation, earnings, or sectoral exposure, and attribute portfolio performance accordingly. Some factors carry negative risk premiums, meaning they offset other risks; for example, gold often provides protection in inflationary environments. By the same logic, discounting should be decomposed across different forms of capital, yet prevailing practice flattens these heterogeneities into one uniform rate, obscuring the distinct dynamics of multiple capital contributions.
78 Traeger, C.P., 2014. Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity. Economic Theory, 56, pp.627-664. 79 Fisher, A.C. and Krutilla, J.V., 1975. Resource conservation, environmental preservation, and the rate of discount. Quarterly Journal of Economics, 89(3), pp.358-370.
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