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Gamma Discounting and the Combination of Forecasts

24 Pages Posted: 14 Sep 2010  

Mark C. Freeman

University of Bradford - School of Management

Ben Groom

London School of Economics & Political Science (LSE)

Date Written: September 14, 2010

Abstract

We argue that gamma discounting (Weitzman, 2001) can be understood as a veridical approach to combining experts' forecasts, in which experts are treated as either right or wrong and are weighted equally in pursuit of the 'true' forecast. More appropriate is the optimal-seeking approach in which experts are wrong to varying degrees and forecasts are combined to minimise forecast errors. With uncertainty in the true mean rate characterised in this way the decline in the Certainty Equivalent Discount Rate (CER) is minimal compared to gamma discounting. Using the asymptotic distribution leads to virtually no decline in the CER, even in the deep future. The same is true when small samples of experts are used or when experts are influenced by schools of thought and hence are no longer independent. Risk adjustment is further shown to have minimal impact on our results, with obvious implications for policy.

Keywords: Gamma Discounting, Declining Discount Rates, Veridical, Optimal-Seeking

JEL Classification: Q51, Q54, Q58

Suggested Citation

Freeman, Mark C. and Groom, Ben, Gamma Discounting and the Combination of Forecasts (September 14, 2010). Available at SSRN: https://ssrn.com/abstract=1676793 or http://dx.doi.org/10.2139/ssrn.1676793

Mark C. Freeman (Contact Author)

University of Bradford - School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom
+44 (0)1274 234363 (Phone)
+44 (0)1274 546866 (Fax)

HOME PAGE: http://www.manag.brad.ac.uk/people/people.php?name=mcfreema

Ben Groom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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