xt7bk35mb64d https://exploreuk.uky.edu/dips/xt7bk35mb64d/data/mets.xml   Agricultural Experiment Station, Department of Agricultural Economics, University of Kentucky 1976 journals kaes_research_rprts_25 English University of Kentucky Contact the Special Collections Research Center for information regarding rights and use of this collection. Kentucky Agricultural Experiment Station Research Report 25 : October 1976 text Research Report 25 : October 1976 1976 2014 true xt7bk35mb64d section xt7bk35mb64d  I ON THE PROPER
  DISCOUNT RATE FOR PUBLIC INVESTMENT
  PROJECTS IN NATURAL RESOURCES
 i BY
  Angelo: Pagoulatos and Larry A. Walker _
  •
IQ  Resexmcn neeont 25: october 1976
  University of Kentucky :: College of Agriculture
 I Agricultural Experiment Station :: Department of Agricultural Economics
  Lexington I

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Il.
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 CONTENTS
‘ Page
[_ Introduction ........................................ 3
Il. Alternative approaches to tlic determination of the discount rate ............ 3
A. Opportunity Cost Appraisal ........................... 4
B. Social Rate of Time Preference ......................... 6
III. Inclusion of risk and uncertainty, taxation, intangibles and inflation in the determination
of the discount rate ................................. 9
IV. Institutional Factor ................................... 15 I
\'. Conclusion ........................................ 17
i Bibliography .......................................... 19
2

 ON THE PROPER DISCOUNT RATE FOR PUBLIC
INVESTMENT PRO] ECTS IN NATURAL RESOURCES
by
Angelos Pagoulatos and Larry A. Walker*
I. INTRODUCTION II. ALTERNATIVE APPROACHES TO THE
, . . . . DETERMINATION OF THE DISCOUNT
lhe proper discount rate for public RATE
investment projects in natural resources is a
topic for which there simultaneously exists a The need for public investments in our
considerable degree of knowledge, yet a society is obvious. However, analysis of these
surprising degree of confusion when one expenditures is subject to complexities,
attempts to transpose this knowledge into primarily owing to the multiplicity of
actual policy. Economists understand government objectives, i.e., I) the provision ‘
thoroughly just what this variable should of public goods; 2) the redistribution of
measure   the welfare foregone by not having income; 3) dealing with externalities: 4) the
these benefits. Above all, economists and management of publicly owned resourcesgand
politicians alike are generally in accord on the 5) the removal of imperfections in the
view that a very serious misallocation of functioning of the private market system, or
_ resources can result from the use of an the alleviation of external effects.
I incorrect estimate of the discount rate in Government investments in water resources
benefit—cost (B/C) calculations. However, may contain all these categories of benefits in
there is considerable controversy concerning the objective function. Evaluation and the
how such elements as risk and uncertainty, proper weighting of the Government activities
taxes, intangibles, externalities, inflation, and are particularly difficult. Each activity is
society’s future welfare should be likely to have multiple objectives and cardinal
incorporated into the present value formulas. utility measures, and hence interpersonal
As a result economists, politicians, and utility comparisons are impossible.Therefore,
government agencies provide, in print, there exists great difficulty in making
estimates of the proper discount rate ranging comparisons and evaluating trade-offs
from Oto I5 percent. between program objectives (15-18). Such
The objectives of this paper are topics must be considered when developing a
separated into three parts. Part I explains the discounting procedure for public investments.
rationale behind the main theories with The derivation of a proper discount rate
respect to the derivation of the proper social is based upon the explicit consideration of
discount rate. Part ll clarifies how risk and balancing a society`s time preference and the
uncertainty, taxation, intangibles, productive possibilities of alternative
I externalities, and inflation should be investment against retums from a particular
incorporated into B/C analyses. Part lll shows set of physical capital assets. To determine
that, given our institutional arrangements, whether an investment is worthwhile, it is
there exists the possibility of significant necessary to incorporate a discounting
Constraints to the actual policy procedure to compare an early net outlay
implementation of an economically optimal with a later return, i.e., dollar quantities
discount rate. received at different points in time. Given the
time preference, production possibilities, and ·
the ability of the consumers to alter the time
*Assistant Professor of Agricultural Economics Stream Of their Fousumption   borrowing
University of Kentucky and Agricultural Economist (NEAD) wd lcndlng a Smglc rate Of Interest \NPu1d
ERS—USDA, Washington, D.C. occur if there were no uncertainty.
3

 4
i . invest
. diffic
Q Nor i
variol
I Consumers and entrepreneurs would both individuals constituting the present societyl um,
adjust their activities to that rate of interest. (17-92). Some literature mistakenly views the ll,C'
In an economy where there are no 0PP<>ff¤¤liY €0$t 0¤lY in terms ef funds Amt
— barriers among markets and no risk or withdrawn from investments in real physical sdm
uncertainty, the govemment should also use capital i.e., assumes all resources used would _ CMC,
that single rate as its discount rate for have been invested. However, the funds used mm
1 investments under an opportunity cost by government PY0gf2.mS are withdrawn ¤0l wjlll
e ( approach. To depart from this rate would only from investment in real physical capital
reduce the total productivity of the economy. but also from PYiV8¥€ €0¤$¤mPti0¤· Granted desig
Using a higher discount rate would cause the that the funds come from both private mlsl.,
_ government to ignore investments that would consumption and investment, there still is Inky,
* » have a larger return than that available from disagreement among economists concerning Cllpll
opportunities in the private sector, thus how to derive the proper discount rate. Three llml_
diverting resources into lower pay-off areas. variations to the opportunity cost approach ( lllm-
i The application of a lower discount rate will be discussed. cult
· ` would result in the opposite effect. However, Baumol proposes that the correct social mm
problems arise because reality is more discount rate for the evaluation of a lads
c complex than this model. Owing to such government project is the weighted average of lgtks
market imperfections as barriers to entry, the percent rates of return that the resources the
administrative costs of borrowing and lending, would otherwise have provided in their inlay
l imperfections in information, slow respective areas within the private sector by
adjustment processes, inherent aspects of risk (27-489). The weight assigned to each area is orga
and uncertainty, taxes, and extemalities, the the proportion of the total resources coming to it
Y normative significance of the actual rates from that sector. If the projects derive their liabi
T found in the market is lost (16-19). These resources from different sectors, then their _ prot
` imperfections give rise to two main opportunity costs may vary. Consequentlyit in t
viewpoints with respect to developing a may be possible to decrease the opportunity ’ sour
¥ i proper discount rate for public investments. cost rate for a project by careful planning of num
These are: the means by which its resources are cnn]
a) the Opportunity cost Of Public obtained. In particular, a project designed to g
i Capital draw heavily on resources which would imc
· t otherwise be unemployed will incur an loan
, ` i b) the social rate of time preference. opportunity cost that is quite low (11-67). l lead
Q A. Opportunity Cost Appraisal Thej simplicity of Baumol`s weighting con;
· scheme is deceptive. It is not cass to mist
l . The opportunity cost approach views the determine from which productive sectors the fort
l   discount rate applied to government programs resources for a given project will be drawn. (17.
l § , ( as reflecting the cost of the funds withdrawn What one seeks in trying to obtain this . wot
Q Q _ from the private sector of the economy. This information is the catalog of the decrements Kru
  E ’   transfer should be undertaken only when a in the outputs of the various portions ofthe bor
g   , potential project available to the government private sector resulting from the public eosl
T   offers social benefits greater than the loss lim
{ l sustained by removing these resources from l SOV
  j j the private sector. This approach views larnciency is a rename concept dependent upon ¤ md?
_ ( ( economic efficiency as one of the significant ‘g’;;’;f;;'{°°”‘° d;‘:*P:‘;?“·   ’i* °f ‘*;;‘u°“‘:J'c;;;‘::;::l Volt
 a . Criteria and requires measurement of gains with thc"`T£;md; ngznzztg "b°y ":°°;m¢;m incomc Sou
g I and costs in terms of the valuations of the distribution.
l f Y , bas
l ? *
l.  
1   .

 5
investment program. Viewed in these terms, funds. He believes that there exists a definable
difficulties in using the model are obvious. pattern in which government borrowing
. Nor is it easy to judge the rate of return on displaces private investment. This is
tqipioits types of debt and equity. lt is not determined hy the relative sensitivity of
I cngy to derive a single number representing different types of investment and, possibly,
l€ the rate of return on companies’ capital. savings to changes in the degree of tightness
is Another questionable facet of Baumol’s of the capital market. On this ground, he
al scheme is the incorporation of risk and prefers the opportunity cost of borrowed
ld externalities into the discount rate rather than funds approach, as opposed to an unknown
id into the net benefit stream. This last point and unstable mix of opportunity costs of tax
Ol will be discussed in Part Il. funds, or to a weighted average containing a
$81 Krutilla and Eckstein developedamodel mix of taxed and borrowed funds, as the
Bd designed to reflect the social cost of capital relevant discount rate (16-63).
1-6 niised through federal taxation. This model Harberger contends that the government,
is takes account of the actual structure of by its normal borrowing operations, does not
ng capital flows in the United States. They felt control the income distribution by the type V
sc that, in considering alternative methods of of investment displaced. Lending terms are
eh financing water resources development and in likely to be tightened by financial institutions
evaluating the economic worth of projects, to all classes of borrowers, and a.re unlikely to
:ia1 y reasonable estimates of the social cost of fall exclusively on one class, i.e., not entirely
21 _ federal funds are essential. Krutilla and upon the corporate sector. lf one is to use
of Eckstein tried to determine the incidence of private sector rates of return to obtain the
:es the marginal tax dollars. This required a opportunity cost of public funds, under
cir quantitative study of the revenues produced present institutional arrangements in the
tor by different taxes, the persons and capital market, it would be a weighted average
t is organizations who pay the taxes, the extent of these rates of return applying in all relevant
ing to which taxpayers are able to shift their tax sectors. These weights should reflect the
teir liabilities, and an assumption concerning the degrees to which investment in each sector is
teir i proportion of various taxes that would be cut estimated to be displaced by public sector
‘, it in the event of a contraction. Once the borrowing. When government borrowing
tity sources of money were ascertained, values to displaces private investment. the cost of such
; of attach to these funds in their alternative uses borrowing to the economy is better measured
are could be estimated. by the interest rate on government bonds plus
. to The imposition of a tax to finance public the tax loss on the income foregone because
uid investments is similar to levying a compulsory of tlie displaced investment, rather than by
an loan or forced saving upon a community. This the overall yield productivity of the displaced
leads to reduced private investment and investment. Harberger`s calculations account
ting consumption. The social cost of the capital for the effects of government borrowing on
to _ raised from foregone investment equals the sales, excise, and property taxes. He contends
the foregone rate of return on private investments that the tax changes really represent external
wn. (l7»85). To estimate the cost of funds which effects of the government’s borrowing, and if,
this would have been spent for consumption, as federal tax revenues are changing, there
ents Krutilla and Eckstein turned to the saving and exists simultaneous changes for state and local
the borrowing behavior of households. The social governments, then these additional changes
.blic T cost with respect to this portion of the federal should also be counted.
funds equals the interest rate which the Comparing the merits of the opportunity
government would have to offer to the taxed cost approaches under the tax scheme vs. the _
pon s individuals to induce them to grant the loan federal borrowing scheme, Eckstein feels that
unl"; V0lUntarily. Then a weighted average of these both derived rates are pertinent but heavier
izgilc $0Ul‘Ces of funds is taken, weight should be given t0 the estimate based
Harberger presents a third rationale upon tax financing because: l) the bulk of
based upon the opportunity cost of borrowed federal financing comes from taxation; 2) a

 6
y I y sector-by-sector approach, assumingaspecific effect, in a transfer from thc consuming i¤1¤Y<
, incidence of marginal taxation, is more public to the capital owners. Since B/C illicit
g T A trustworthy because it corresponds to the analysis does not incorporate distribution measi
i actual conditions under which public capital theory, the social optimality of such transfers MOYC
i is raised; and 3) after the money sources are is not indicated in the analysis; 4) L. E. Lynn, inten
identified, the return on capital in those _]r., the deputy Assistant Secretary of Defense maxi
sources has to be estimated only once in 1968, stated the belief that the government not
(17-67). Actually the relevant consideration is can be assumed to finance its activities out of i¤V€$
s where the marginal dollar comes from for the tax revenues, and in the long-run, the equiv
public projects. This is not known except for alternative to more government spending is rctur
the case of earmarked taxes. However, since lower taxes, not less borrowing. The amount schcc
V the far greater proportion of federal funds that the government plans to borrow each oplif
comes through taxation, the contention that year should be assumed to be determined to
more weight should be given to the tax mainly by how much the government wants — invc
. scheme seems plausible. The problems with to stimulate or restrain aggregate demand by deter
’ i this model include: 1) deciding what weights varying the size of its deficit or surplus, not sChe<
should be assigned to the opportunity costs of necessarily by the level and composition of cost
j funds raised by each of the innumerable government investments; and 5) to calculate pairli
_ i possibilities of increasing tax revenues may be the tax loss by displaced investment, one still time
quite troublesome; 2) determining the true must calculate the overall yield productivity S<>€i<
incidence of all taxes is a problem still to be displaced. , the <
Solved; fmd 3). t.hcr€.iS Simply no stfmdard B. Social Rate of'I`ime Preference Ol ill
pattern in administrative recommendations or 5110-
congressional decisions about changes in tax The social rate of time preference fltltl
f3t€S, YHX bases, and tht? like. scheme refers to a radical departure from the mul
' The federal borrowing method, m €ff€€t, opportunity cost approach. This proposal, as '°ll°
is 8 1>¤dg€i¤fY €0¤€€Pt ofthe discount fate described here, rejects the judgment of the ` 1"Of
I reflecting the revenue and spending impact of private market as a basis for determining the muy
U government borrowing. lt would be discount rate and advocates that the rate Ol C
g appropriate if one viewed the government as ought to be a tool of policy, specifically be lt
T h¤V1hg thc PYim&1’Y 0bj€€t1V€ of maximizing reflecting governmental objectives. One ofthe sl
`A its net worth. Harberger’s model does possess ohieetives most referred to is eoneern for ( Pftl'
tht? economic logic that when attempting to future generations who can not express their mm
measure the cost to society from government desires in the private market, but Whose lll tl
_ borrowing, there is no ground to distinguish welfare should be no more discounted than “’_ $
n between Wl1€l2llC1' the 113.XCS l-OI`CgOI`l€ OI'1 [11C that Of [hc present g€ncya_[iOri_ Angtiigr Wllll
. income from displaced investments would eoneern is grgwtii, in [gyms of both ineorne
T have 3€€l'U€d to the federal. $t¤t€, OY local and social well-being on a per capita basis. rtw
E governments. By focusing on federal taxes Therefore, the government should endeavor Plsl
5 _ ( stone. *1 l'€P0Yt uhd}l1Y YIUYOWS its focus. to provide for the welfare of future lllltll
y 3 However. Herbergers mf->€1€1 also faces generations and the future welfare of the tw?
( _, . apparent problems, tig-, 1) 1116 federal present generation in a more rational way S°_Cl
  g V long-term borrowing rate presupposes that the than the people would themselves. This el l
l 3 ( i clltlltc Cost of projects is tlhahccd Out of corresponds to Pigou’s contention that "...our st
E   V voluntary bond purchases, and that the risks telescopic faculty is defective" (6-366), and ptcl
4   21tt3.Cl`1€d to PI;Oj€CtS BIC l)OI`I1€   Ill€ bl1YCI`S [hat ggvgynmgnt is [hg guardian Of [hc Curl
»   . y " two Cohdltlohs that do h-Ot hold (17-91) interests of both present and future mul
. l g and 2) the rate is relatively risk free. Why this generations. hm
L may understate the proper social discount In defense of this position it can be Yclh
  > rote will be covered in Part 11; 3) as a argued that in a perfectly competitive im"
l   consequence of additional borrowing, the eeonorny, the opportunity cost of publie . mc
i Q ( . yield on capital increases. This results, in funds could be represented by the market gow
: 3 ·
` L ,

 7
_g interest rate, but in our economy no single utility of consumption at different points in
C interest rate, or rate of return, can fully time. Through time, thc STP rate may vary in
H measure the social opportunity cost of funds. response to changes in the consumption levels
rs _ More importantly, even if a perfect market and growth rates, the rate of population
(L interest YLILC could guide private investors to growth, and the pure time preference rate. lt
Sc maximize their welfare over time, it would is not unreasonable to expect the STP rate to
H not necessarily produce socially optimal rise as a function of time.
){ investment decisions. A perfect market would When one critically views the social rate
,c equate private demand (investor’s rate of of time preference approach, it is impossible
is return) and net supply (willingness to save) to refute the argument that what appears
M schedules. However, to produce "socially" optimal in the private sector is hardly socially
Zh optimal decisions, an interest rate would have optimal owing to the presence of private costs
Ed to equate the social productivity of and benefits not always equalling social costs
(ts investment schedule with a politically and benefits, i.e., owing to externalities.
W determined, socially optimal, saving supply Indeed, externalities are a partial defense for
Ot schedule. Therefore, the social opportunity the need of government investments and .
Of cost depends upon the source of the regulations. Also, this approach actually
nc particular funds and must reflect the social incorporates the opportunity cost approach
[iu time preference (STP) function. ln short, a by assigning shadow prices to reflect the
ity society may wish to replace weights given to productivity of funds in private investment
the opinions of individuals by the distribution along with the social time preference (6·379).
of income and wealth with other weights, Therefore, this becomes a type of systems
sucl: as those given in the ballot box (6-364). analysis approach where both market and
ice Further, divergence of the STP from nonmarket information is placed before a
the market—expressed time preference need not supposedly informed, nonbiased, rational
.as reflect conflicting opinions of different decision—malme Fcldstein provides an interesting graphic return in the private sector has been two,
ms. representation of the theory by utilizing three, even four times greater than. the
wor l*`1sher`s two-period indifference curve discount rate used by some public agencies in
ture analysis. The indifference curves represent their B/C analyses. For example, in 1968 the
the two—period STP functions, reflecting the average rate of return in the private sector was
wav social consumption-utility function in terms nearly l2 percent, while the discount rate
This of total and per capita consumption, the rate used for federal water resources projects was
.our ( of population growth, and the pure time 3% percent (16-21). This effectively taxes the
and T preference discount rate. The slope of these present generation for the benefit of future
the curves at any point indicates society’s generations. The argument by Marglin that
ture marginal rate of substitution of present for individuals, in their public role as citizens, _
future goods » the STP rate between the two may be willing to save for future generations,
i be _ years. The STP rate is, thus. defined for each if others are also willing to do so-, has been
Litivc Pllml in the consumption space in terms of strongly disputed by Tullock and Lind. ·
Jblic the STP function. This rate reflects the Tullock notes that, although the saving
irltet governments judgment of the relative social by one group for the material benefit of

 8
A _ another group may be magnanimous, the idea consumption. Projects will be chosen which in-
, of a present generation saving for the benefit offer the highest return, regardless of their
Q of a future generation may be unrealistic, longevity. Thus, the fact that a government
since the next generation will probably be does undertake long term investment projects
s relatively more wealthy, even if the discount does not necessarily show either that: 1) the
rate used is that determined   the private gOV€I`I`ll’HCI1t ll3.S violated [l\€ PI`Cl`€I`CHCCS of `
sector (28-334). Baumol describes Marglin’s th€ €l€€t0Yat€, 2) the €l€€I0rS ar€
Seheine as •·a Robin I-lood..aetivitv Stood on schizophrenic with regard to preferences B C
l its hcad,’ (3-g()())_ Even more etitieal of revealed in the market and at the ballot box, tr/_C
So-ealled mathematical ntoon e_g_, l) even from the consumption of future generations. _ _
i Marglin terms his assumed value for the Baumol adds t0 this t€P€tt0t'Y of Ycastms ali;
marginal utility an individual places upon to question the argument that the discount wt
` consumption by the next generation relative 1`aT€ should be kept very low in order to A tl
i _ to his own as ··alttniStie indeedn (l9-l()2) and induce an increase in investment today, as a um
' 2) his linear equation puts the possibility of €0¤tYtb¤tt0¤ to ths N¤tt0¤’s W€lt¤Y€ Risk
one genetation hestovving ehatitv to both its tomorrow. Surely, if society’s investment for
I Own mcmbgys and future ggngrations in clear tl`lC fl1tuI`€ is COI`ISldCI`€d to be iHB.d€ClU3.t€, tl`l€
opposition (28-334). However, collective appropriate remedy is to institute
provision by 3 Present generation for its poor simultaneous iI1dL1C€IT1CI1tS to bO[l1 private and  
seems more likely than investment to benefit public capital formation (27-500). Actually, `_fiI_1'
future generations in general (i.e., the rich and Baumol may be over extending himself with uq
i poor alike). The crises of our cities, the this statement. lt is questionable just how i Subj
( problems of the impoverished and much the government can stimulate more mn
underprivileged minorities, and a variety of capital formation given a full-employment {End
( other critical issues may well require, for their economy. Nevertheless, he legitimately says on
resolution, increased governmental activity. that artificially low discount rates on public .  
i But these call for investments whose yield is projects introduce serious inefficiencies into Sm].
V quickly obtainable, not long term the investment process by causing the Sub]
investments, the bulk of whose benefits will withdrawal of resources from areas of use in acct
become available in the more distant future. which the yield is high and transferring them ets
7 Advocacy of a very low discount rate in these to areas in which their return is low. am
circumstances is tantamount to the view that Those who maintain that there exists
those immediate problems are not very inadequate provision for the future often to
pressing, and that society’s resources are draw incorrect inferences from irrelevant (m_
better transferred to the service of the particular cases. lt is hard to argue with the vim
wealthier, future generations (27-50), conservationists’ view that the destruction of im)
Lind continues the criticism of Ms_rglin’s irreplaceable natural resources imposes a lm
_ work by showing that so long as there exists heavy cost on posterity. The destruction of a SPO
* an overlap in the life span of different portion of a canyon, tht? extinction of 3 aio
generations, then, a generation which derives wildlife species, and the extreme erosion of di;
. satisfaction solely from its own consumption soil are all matters of serious concern because dist
T may rationally undertake investments that they are carried to the point of irreversibilit)'. fa
, . will Outlivc it, Sinee thc titles to Capital gggds This is the point where conservationists and gis
can be transferred to each succeeding economists merge in urging increased care in um
generation in exchange for consumption avoiding depletion of our resources. However, dist
( , goods in exactly the same way as Private it is not legitimate to jump from this valid . pm
_ individuals complete such transactions in the point to the questionable conclusion that it i
market (18-337). Additionally, it follows that €¤€h generation is ¢¤¤strai¤¢d tO engage in eo,.
the govemment may undertake long term “0V€t”aH” Cttotts tO s“PPOtt its Postcmy fe ani
s investments in order to maximize the utility beyond tht? level indicated by a fr€€ market San
» I that the electorate derives from its sYst€m·
, i
it .

 9
ill ]ll_ INCLUSION OF RISK AND UN- SCHSCS that are often confused. ln one sense,
·ir (jl·lR'I`AIN'l`Y, 'l`AXA'l`ION, INTANGI- risk is the dan er that rcalit # mitht somehow
_ _ S _ 5 A
nt BLES AND INFLATION IN THE lull Short oi expectation. A more neutral use
ts [)E'[`ERMlNA'[`lON OF THE DISCOUNT of the word in technical literature refers to
ae RA']`};]_ the fact of variability of "outcome," whether
of  » favorable or unfavorable. From now on, "risk
rc Any discussion of discount rates used in :2;/Ftslon rpgu jésyusjd Syncmg miuslg Zlvlgh
le ‘ . - · - n ase. e Y
  B/C     netted unsmelewt tt.?   t°Ot‘?L’3.°L°.Z1L§“$rtt€°»—“?§$a L
` t taxes, intangibles, externalities, and inflation. . . P . . .p ` I J .
ty Thcw hgmrs were Often improperly probability distribution of numerical (dollar;
1S' incorporated into the B/C framework. Outgobllfx mi gxpcctcd "viguc 1; tits
im Thgygfgrey it is appropriate to discuss these Priha ";Y‘;1'€‘g lc ‘i‘;€“g‘*· b Sc Od dt"?
·‘“ sms and to try to clarify ti situation left man cmg W €XP"°“’ *F’“_°?*“ C mg? €_ ?S
to unclmrbv the gcmjmlmcmturc a correction for optimistic or pessimistic
s a i i' bias," and must not be confused with
are Risk and Unccnaimv adjustments that might be made to allow for ‘
for ' variability of "attitudes" toward risk. From
he While risk and uncertainty have different DO`; Ovn’ z?tUtuC§lTla1_ ?S;`h_av€rS1On Wlu be
Mc connotations ("risk" suggests the potential use ;;_nOhr;U?OuS ldlgil ,1S cis? _ th t _
md variability of the objective configuration of _ u·S_?1Cr_a“n_ Mlplm slew 2% m
lly, events {mile ttuncwmimvtt underlies Our dealing witn attituchnal risk aversion one 15 no
uh subjective lack of knowledge as to which longcrfm a posltjonifot make ?‘1O“?;1C€S’t_Of
' . . . . . . » ` _ Q C \' Q" Q
O" configuration will become reality), Hirshleiier gina gon; Ser ciulcf Q2; Deng; tlglgulci
Orc and Shapiro`s approach will be adopted — no Céus a , m _ F ,  
ent formal diqinctiou will bc made between them the investor s degree of r1sk—pre.erence. Vvhile
gis (26-506). Both terms will be used to express a dx EXPCC:-jdf\’?1u€b;;§rCS;;tS iucfrgiitgonfgi
. . . . . . · n o w
lc situation in which, whether for objective or &tt,(;“;n;1 r_ k a\_€1_SiO’n leads [O the Concc t
UFO subjective reasons, analysis requires us to take afi th; Ciaimv 6 uiwllcm value Of in
tic account of the possibility of a number of Encermin gutcomévglg 507)
C m alternative outcomes, or consequences of _ " , °
tem actions One important issue, where the two
. one tradition in the literature attempts °°“°°P‘$ E°‘ “S., ha`? °a“°°“ °°“ ““°“*
usts . . . . _ · , conccms ine ability ot the government to
fm} to distinguish between risk and uncertainty “ IU a lm C Iiumbcr OI, hide mdcm
on the basis of ability to express the possible ,pOO g _ t. I P b
fin variability of outcomes in terms of a uxicstggcmsh. aim; r.tl11€£C,t;jw Ljgtderjiin iii;
ie . .· . . . . . _ is ·.
i. probability distribution. According to this gtfgc Céll°u1g;n°thC Statistical lawbfglarqc
H O tradition, when one does not know the lc I S _ lx .. Y. ~
cs zi Specific Outcome but docs know the numbers. "llns law states that it there exists a
. . . . ’ . . . · if `ide endent ro`ects no
fa probability distribution, there exists risk; Img? Qujnbgr 1; cuas EO aft-Cctptglc mfcmu
3 i when one does not even know the probability PTO]? sd sn dwg a\__1_a C Outcome Obtained
n O distribution, there exists "uncertainty." This ici? 5* K3`;. me th; Hithcmaticzl ex acted
Fillsc distinction has proven sterile. One cannot, in lil €aPpTh‘i;mU€n mms the idea thi the
'_ . . . . . ' _ C
lmd praetice, act rationally without summarizing \ u cnt mz _ mmctimcs be in a Osition
mi his information (Ol. Conversely his govgnlge risk in the sense of varialiiilitv of
rem Uncertainty) in the form of a probability Otlg C The mathematical CK cctatima Of
  d***b¤*0¤· <27·5°8>- Am“>’·   eu °§.f§’“`O;. Ovt.»..m...t t...»s....;§it. becomes
V I probability distributions contain subjectivity. r g . _ . - _
that _ . _ almost a certainty overall. However, if the risk
,n lt is only when there exists a general , uestion is ·b€CauS€ the rcmms from
gc fl C0nsensus concerning a certain probability of m gnmcm l_O.cCtS are t Y icauv stated in im
Y ki; an event that the variability of the event is gov t. PHJ yay mg;) thejaw Of lar C
ar c Silid to exhibit an objective configuration. Ov€r_OP imls C “ ‘.’ h g
The Word nriskn mists in {WO different numbers is not applicable. The fact t at the

 e 10
i · T government engages in many such projects B/C €§iim¤t€$ MC l}ighlY
` will in no way eliminate bias. Haveman conserv