Simon Dietz (LSE Grantham Institute): Spaces for agreement: A theory of Time-Stochastic Dominance and an application to climate change

Abstract: Many investments involve both a long time-horizon and risky returns. Making investment decisions thus requires assumptions about time and  risk preferences. Such assumptions are frequently contested, particularly  in the public sector, and there is no immediate prospect of universal agreement. Motivated by these observations, we develop a theory and method of finding ‘spaces for agreement’. These are combinations of classes of discount and utility function, for which one investment dominates another (or ‘almost’ does so), so that all decision-makers whose preferences can be  represented by such combinations would agree on the option to be chosen. The theory is built on combining the insights of stochastic dominance on the one hand, and time dominance on the other, thus offering a non-parametric approach to inter-temporal, risky choice. We go on to apply the theory to the controversy over climate policy evaluation and show with  the help of a popular simulation model that, in fact, even tough carbon  emissions targets would be chosen by almost everyone, barring those with arguably ‘extreme’ preferences.