Using Historical Simulation to Compare the Accuracy of Nine Alternative Methods of Estimating the Present Value of Future Lost Earnings

Abstract

To estimate the present value of future lost earnings, forensic economists must employ some method to determine the interest rate and the earnings growth rate, or the net discount rate derived from them, to use in that estimation. Historical simulation can be used to determine how accurate any such method would have been had it been used in the past. In this paper, historical simulation is used to compare the accuracy of nine different methods of choosing the net discount rate to estimate present value for numerous 30-, 20- and 10-year loss periods. These methods include historical averages, current rates, recent rates, total offset, and a number of methods that combine historical averages with current or recent rates. While no one method is obviously superior in all cases, the results do provide some support for blending historical averages with current or recent rates.