An evolutionary explanation for risk aversion |
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Institution: | 1. Department of Geology and Geophysics, Yale University, New Haven, CT 06520, USA;2. Department of Chemical and Physical Science, University of Toronto-Mississauga, Mississauga, ON, L5L 1C6, Canada |
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Abstract: | Recent models of the evolution of preferences have provided profound new insights into the origins of risk attitudes. In most of these models the evolutionary “objective function” is the maximization of the expected number of offspring, or alternatively, the maximization of the geometric-mean growth rate. We suggest that careful consideration should also be given to the objective of maximizing the probability of Having Descendants Forever, p(HDF). We show that the p(HDF) criterion implies risk aversion. Moreover, it leads to preferences that are very closely approximated by the constant relative risk aversion preferences. Thus, constant relative risk aversion can be viewed as an evolutionary-developed heuristic aimed to maximize the probability of having descendants forever. |
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Keywords: | Risk aversion Evolution Extinction Having descendants forever CRRA preference |
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