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Weber's Law and the Biological Evolution of Risk Preferences: The Selective Dominance of the Logarithmic Utility Function, 2002 Geneva Risk Lecture

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  • Hans-Werner Sinn

    (CESifo (Ifo Institute for Economic Research and Center for Economic Studies, University of Munich), Poschingerstraße 5, 81679 Munich, Germany, e-mail: sinn@ifo.de)

Abstract

The paper offers a proof that expected utility maximisation with logarithmic utility is a dominant preference in the biological selection process in the sense that a population following any other preference for decision-making under risk will, with a probability that approaches certainty, disappear relative to the population following this preference as time goes to infinity. The result is contrasted with Weber's and Fechner's Psychophysical Law which implies logarithmic sensation functions for objective physical stimuli. The Geneva Papers on Risk and Insurance Theory (2003) 28, 87–100. doi:10.1023/A:1026384519480

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  • Hans-Werner Sinn, 2003. "Weber's Law and the Biological Evolution of Risk Preferences: The Selective Dominance of the Logarithmic Utility Function, 2002 Geneva Risk Lecture," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(2), pages 87-100, December.
  • Handle: RePEc:pal:genrir:v:28:y:2003:i:2:p:87-100
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    References listed on IDEAS

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    1. Mark Rubinstein., 1991. "Continuously Rebalanced Investment Strategies," Research Program in Finance Working Papers RPF-205, University of California at Berkeley.
    2. Henry Allen Latane, 1959. "Criteria for Choice Among Risky Ventures," Journal of Political Economy, University of Chicago Press, vol. 67, pages 144-144.
    3. Arthur J. Robson, 2001. "The Biological Basis of Economic Behavior," Journal of Economic Literature, American Economic Association, vol. 39(1), pages 11-33, March.
    4. Raymond Battalio & Leonard Green & John Kagel, 1995. "Economic choice theory. an experimental analysis of animal behavior," Framed Field Experiments 00166, The Field Experiments Website.
    5. Sinn, Hans-Werner, 1980. "Ökonomische Entscheidungen bei Ungewißheit," Monograph, Mohr Siebeck, Tübingen, edition 1, number urn:isbn:9783169427024.
    6. Karni, Edi & Schmeidler, David, 1986. "Self-preservation as a foundation of rational behavior under risk," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 71-81, March.
    7. Robson, Arthur J., 1996. "A Biological Basis for Expected and Non-expected Utility," Journal of Economic Theory, Elsevier, vol. 68(2), pages 397-424, February.
    8. Sinn, Hans-Werner, 1985. "Psychophysical laws in risk theory," Journal of Economic Psychology, Elsevier, vol. 6(2), pages 185-206, June.
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    Cited by:

    1. Rehme, Günther, 2014. "Endogenous (re-)distributive policies and economic growth: A comparative static analysis," Economic Modelling, Elsevier, vol. 40(C), pages 355-366.

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