SOCIAL INVESTMENTS AND THE RULE OF 72.

SOCIAL INVESTMENTS AND THE RULE OF 72. Kids, here is another application of the Rule of 72. The Becker-Posner blog is the most distinguished blog in existence because it unites the most interesting legal writer and thinker of our time (Richard Posner) and a path-breaking Nobel Prize winner in economics. Gary Becker, in his discussion of social discount rates takes 3 per cent as the usual social discount rate for policy analysis (deciding on public investments, for example). Becker points out that “Even with the “small” discount rate typically used in policy analysis of 3 percent, the effects …on the utility of generations fifty years from now will be weighted only a bit more than ¼ as much as the effects on the utility of the present generation. Generations 100 years in the future would be weighted a mere 1/16th as much as the present generation. With a 3 percent rate, the weights are cut in half every 24 years, or approximately every generation.” Notice that Becker is using the Rule of 72 (72 divided by 3 gives 24 as the period for halving rather than doubling). As a comparison, using a “hurdle rate” for a corporate investment of 9 per cent would, using the Rule of 72, lead to the weight being cut in half every 8 years so that a dollar 24 years out would be weighted a 1/16 of a current dollar. In practical terms in the context of business decision making, this leads to returns (revenues) in outlying years being heavily discounted pretty quickly.