Prudent Investing and Economic Damages: A Reply to Comments
Format of Original
American Academy of Economic and Financial Experts (AAEFE)
Journal of Legal Economics
In an earlier paper in this journal (Breeden & Brush, 2008), the authors addressed contemporary prudent investor practices associated with modern portfolio theory and discussed their implications for forensic economists' calculations of the present value of future damages. This reply will address the key criticisms of the present authors' approach found in the two preceding comments in this issue, one by Philip Rushing, and the other by Larry DeBrock and Charles M. Linke. The comments of Rushing and DeBrock/Linke have raised challenges to the position that the discount rate used to discount future losses to present value should reflect the manner in which the lump sum award is likely to be invested. The present authors acknowledge that in making the determination of the appropriate risk-adjusted discount rate, both the volatility of equities markets and the need for periodic withdrawals from the invested funds are relevant considerations. Further research on these issues is clearly needed.