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An evolutionary explanation for risk aversion

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  • Levy, Moshe

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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  • Levy, Moshe, 2015. "An evolutionary explanation for risk aversion," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 51-61.
    • Handle: RePEc:eee:joepsy:v:46:y:2015:i:c:p:51-61
    DOI: 10.1016/j.joep.2014.12.001
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    More about this item

    Keywords

    Risk aversion; Evolution; Extinction; Having descendants forever; CRRA preference;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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