Speculative Hypothesis: Planners’ discount rates are too low

When we are children, we learn the fable of the ant and the grasshopper. Briefly, the ant saves food for winter, the grasshopper doesn’t, and instead goes clubbing. The ant survives, the grasshopper doesn’t. Moral lesson: plan for the future, food isn’t as plentiful in the winter.

Dancing Grasshopper. Source: http://srujanakktrip.blogspot.com/2011/09/ant-and-grasshopper.html
Dancing Grasshopper. Source:

And certainly we should all plan to some extent. Today the personal economic issue is retirement, and many people don’t save enough in the US to live as well as they might like upon ceasing full-time work. This is in part because they lived too well while they were working instead of deferring pleasure.

But there is the opposite view, which is that of “live for today, for tomorrow we may all be dead”. Saving for the future does you no good if you have no future. The earth might be destroyed by an asteroid (think about the poor dinosaurs who spent their lives saving and instead of clubbing, where did that get them?). Or we might destroy ourselves (when I was a child, the boogey-man was Nuclear War, then Nuclear Winter, then Acid Rain, then the Ozone Hole, now Global Warming … there is always a boogey-man). Or our society might be undermined by an outside threat: Emmanuel Goldstein, Osama bin Laden, Abu Abdullah al-Rashid al-Baghdadi.

So how much to save depends on the likelihood of survival and persistence. If I expect to live, or at least be able to transfer my wealth to descendants, my motivation for savings is higher. If I expect to die, or have my assets seized, or depreciated in a major round of hyperinflation, really what is the point?

People engaged in the planning field have by their very nature a longer time-horizon than random. They are looking at public works that will take decades to get built (and years to build), and last many more decades if not centuries.

Forecasts predicting gloom and doom (the scare forecast) (too much congestion on a map painted red) far into the future are “bringing distant dangers near”. We have no reason to plan for tomorrow’s possible problems when we have plenty of problems staring us in the face

From a financial economic perspective, it is often unwise to make these long-term speculative investments, or even plan to make these investments, their payback period is too long, the technology may change in the interim. Resources could be better allocated to things which can be made, and innovated, in a much shorter time horizon. The modern version of capitalism ruthlessly (eventually) punishes these investments.

Though I don’t think a formal study has been done, much of the private capital invested in transportation infrastructure historically has been  wiped out [there are many reasons for this, not all of which are market related, some due to regulation], which is why such investments have most recently been mostly left to the public sector. (And recent examples of private infrastructure investment have been nothing to write home about: Dulles Greenway, Indiana Toll Road, the Channel Tunnel, the London Underground are just a few of the high profile disasters.) At a minimum, getting this right is hard.

The discount rate is how we discount future money back to the present, it  the interest rate you earn on investments looked at from the other direction. Are you indifferent to $1.00 today or $1.10 a year from now. Then your discount rate is 10%. The planner’s discount rate asymptotically approaches 0%.

Robin Hanson at Overcoming Bias makes an interesting distinction between “far” and “near” modes of thinking. We are more idealistic in “far” mode. While almost everyone operates in both modes some of the time, some people operate in one mode more often. Hanson points out that “Disagreement is Far“, himself quoting:

Recruiting a sample of Americans via the internet, they polled participants on a set of contentious US policy issues, such as imposing sanctions on Iran, healthcare and approaches to carbon emissions. One group was asked to give their opinion and then provide reasons for why they held that view. This group got the opportunity to put their side of the issue, in the same way anyone in an argument or debate has a chance to argue their case.

Those in the second group did something subtly different. Rather that provide reasons, they were asked to explain how the policy they were advocating would work. They were asked to trace, step by step, from start to finish, the causal path from the policy to the effects it was supposed to have.

The results were clear. People who provided reasons remained as convinced of their positions as they had been before the experiment. Those who were asked to provide explanations softened their views, and reported a correspondingly larger drop in how they rated their understanding of the issues. (morepaper; HT Elliot Olds)

 

Long Range Transportation Planners in practice seldom lay out actual deployment paths, and instead focus on the end state, a vision, a 30-year plan.  A different set of people (or sometimes the same people in a different set of roles) put together a 6-year Capital Improvement Plan. A third set of people deals with annual budgets. A fourth set operationalizes that. A fifth set actual builds and delivers the projects.

As the wise show Parks and Recreation said “There are no planning emergencies”. With the attitude in contrast to most people who live in the now and with urgency, who spend their lives metaphorically if not actually “fighting fires”, it is no wonder that planners cannot meet deadlines. In their worldview, there are no deadlines.

2 thoughts on “Speculative Hypothesis: Planners’ discount rates are too low

  1. It’s not so much that the discount rate is wrong, as that the declining exponential function is not the right way to discount the long-term future.

    Some knowledge of the future decays quickly and some slowly. The discount rate for the first few years should be sizable to reflect fast-decaying knowledge, but once that knowledge has approached zero, you have knowledge with a very long lifetime and the discount rate should be much smaller.

    Like

  2. Excellent post.

    Different temperament types have different views/urgency with regard to the present and the future. This helps make collective actions hard.

    Daniel Gilbert spends many pages in “Stumbling on Happiness” explaining how our biases lead us to mis-imagine the future. The how vs. the why described by Robin probably helps to deconstruct some of those biases and therefore reduces our certainty of our ability to collectively plan our futures.

    Like

Comments are closed.