Historical Net Discount Rates and Future Economic Losses: Refuting the Common Practice
In wrongful death and personal injury litigation, the amount of compensation depends on the difference between the interest rate that the plaintiff is expected to earn by investing the award and the rate of wage growth that the plaintiff would have been expected to receive in the pre-injury occupation. This difference is often referred to as the “net discount rate.” The common practice of using the mean of past net discount rates to estimate the present value of future losses is premised on the assumption that net discount rates are mean reverting. In this paper, we demonstrate that on both theoretical and empirical grounds this premise is erroneous. We suggest that an alternative approach be utilized to determine a plaintiff’s award.
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