I have also gone through the same problem. After doing a lot of research, I found a solution that works.
Run this command:
pik list
It should show you
187: ruby 1.8.7 (2010-08-16 patchlevel 302) [i386-mingw32]
192: ruby 1.9.2p290 (2011-07-09) [i386-mingw32]
193: ruby 1.9.3p327 (2012-11-10) [i386-mingw32]
200: ruby 2.0.0p247 (2013-06-27) [i386-mingw32]
If it's not pointing to Ruby version 200 then run the following:
pik use 200
Now run the following to enhance DevKit to your installed Ruby:
ruby dk.rb install
Finally, run the following:
gem install rails
This will install latest Rails version 4 for Ruby 2.0.