Spring 2017 issue of the Expert Witness newsletter (volume 21, issue 1)

Contents:

This issue contains one article written by the staff at Economica.

Selecting the Discount Rate (2017)

  • Recently, Economica undertook a detailed re-evaluation of our recommendations concerning the discount rate. We argue that plaintiffs have available two alternative methods of investing their awards for future losses: the annuity approach, in which plaintiffs use their awards to purchase life annuities or structured settlements; and the active management approach, in which plaintiffs invest their awards in portfolios of secure financial products, such as government bonds and “blue chip” stocks. We find that the real rate of return is higher using the active management approach than the annuity approach – approximately 2.5 percent versus 0.0 percent. At the same time, however, the risk that plaintiffs’ investments will be depleted before they die is much greater if plaintiffs manage their investments than if they purchase annuities. Accordingly, it may be that risk averse plaintiffs would prefer to purchase annuities than to manage their own portfolios even if they earn a lower rate of return.