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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.

Suggested Citation

  • 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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    Cited by:

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    2. Songjia Fan & Yi Tao & Cong Li, 2022. "Evolutionary rationality of risk preference," Papers 2206.09813, arXiv.org.
    3. Fisher, Patti J. & Yao, Rui, 2017. "Gender differences in financial risk tolerance," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 191-202.
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    5. Terence C. Burnham, 2016. "Economics and evolutionary mismatch: humans in novel settings do not maximize," Journal of Bioeconomics, Springer, vol. 18(3), pages 195-209, October.
    6. Pedro Brandão Graminha & Luís Eduardo Afonso, 2022. "Behavioral Economics and Auto Insurance: The Role of Biases and Heuristics," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(5), pages 200421-2004.
    7. Hylton, Keith N., 2023. "Mutual optimism and risk preferences in litigation," International Review of Law and Economics, Elsevier, vol. 75(C).
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    10. Radoslaw (Radek) Stefanski & Alex Trew, 2023. "Selection, Patience and the Interest Rate (version January 2023)," Working Papers 2023_01, Business School - Economics, University of Glasgow.
    11. Heena Thanki & Sweety Shah & Vrajlal Sapovadia & Ankit D. Oza & Dumitru Doru Burduhos-Nergis, 2022. "Role of Gender in Predicting Determinant of Financial Risk Tolerance," Sustainability, MDPI, vol. 14(17), pages 1-13, August.

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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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