DISCOUNTING UNDER UNCERTAINTY

Suppose asset pricing is governed by the CAPM or the ICAPM, and the ex pected 1-period simple returns on the net cash flows (NCFs) of investm ent projects are constant through time. Then the NCFs are priced by di scounting their expected values with their expected 1-period simple re turns. But when NCFs are priced by discounting their expected values w ith constant CAPM or ICAPM expected 1-period simple returns, distribut ions of NCFs more than 1 period ahead are likely to be skewed right. E xpected payoffs are then larger than median payoffs, and expected payo ffs are progressively more unusual outcomes for longer investment hori zons.