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Evolved attitudes to risk and the demand for equity

Author

Listed:
  • Arthur J. Robson

    (Department of Economics, Simon Fraser University, Burnaby, BC V5A 1S6, Canada)

  • H. Allen Orr

    (Department of Biology, University of Rochester, Rochester, NY 14627-0211)

Abstract

The equity premium puzzle refers to the observation that people invest far less in the stock market than is implied by measures of their risk aversion in other contexts. Here, we argue that light on this puzzle can be shed by the hypothesis that human risk attitudes were at least partly shaped by our evolutionary history. In particular, a simple evolutionary model shows that natural selection will, over the long haul, favor a greater aversion to aggregate than to idiosyncratic risk. We apply this model—via both a static model of portfolio choice and a dynamic model that allows for intertemporal tradeoffs—to show that an aversion to aggregate risk that is derived from biology may help explain the equity premium puzzle. The type of investor favored in our model would indeed invest less in equities than other common observations of risk-taking behavior from outside the stock market would imply, while engaging in reasonable tradeoffs over time.

Suggested Citation

  • Arthur J. Robson & H. Allen Orr, 2021. "Evolved attitudes to risk and the demand for equity," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 118(26), pages 2015569118-, June.
    • Handle: RePEc:nas:journl:v:118:y:2021:p:e2015569118
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    Cited by:

    1. Robson, Arthur & Samuelson, Larry, 2022. "The evolution of risk attitudes with fertility thresholds," Journal of Economic Theory, Elsevier, vol. 205(C).
    2. Yuval Heller & Ilan Nehama, 2021. "Evolutionary Foundation for Heterogeneity in Risk Aversion," Papers 2110.11245, arXiv.org, revised Jan 2023.
    3. Heller, Yuval & Nehama, Ilan, 2023. "Evolutionary foundation for heterogeneity in risk aversion," Journal of Economic Theory, Elsevier, vol. 208(C).

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