The Role Of Stochastic Dominance In Determining Discount Rates In Tort Cases

Abstract

In this paper the basic responsibilities of a forensic economist are introduced. The role of the discount rate in this process is explained. Prior research on the choice of an appropriate discount rate is examined. The forensic economist must choose either a real rate of interest or a nominal rate. The choice is further compounded by the possible need to utilize a risk adjusted interested rate. The role of the variance and stochastic dominance is then examined. Different types of stochastic dominance are explained. It is found that the concept of stochastic dominance is a more general concept of risk than the variance and thus could be more accurate to use when evaluating future income streams in legal cases involving torts.