Discounting, Diversity, and Investment

This paper presents the class of weighted discount functions, which contains the discount functions commonly used in economics and finance. Weighted discount functions may describe: the discounting behavior of groups;... [ view full abstract ]

This paper presents the class of weighted discount functions, which contains the discount functions commonly used in economics and finance. Weighted discount functions may describe: the discounting behavior of groups; uncertainty about what discount rate to use; behavioral time preferences; and all of these simultaneously. We study investment behavior under weighted discounting in the classical real option setting and come up with the following general result. Greater group diversity, greater parameter uncertainty, and more behavioral time preferences lead to a delay in investment and more risk-taking.