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Evolution and Preference for Local Risk

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  • Heller, Yuval
  • Robson, Arthur

Abstract

Our understanding of risk preferences can be sharpened by considering their evolutionary basis. Recently, Robatto and Szentes (2017) found that both aggregate risk and idiosyncratic risk generate the same growth rate in a continuous time setting. We introduce a new source of risk, which is correlated between agents in the same location, but is uncorrelated between agents in different locations. We show that this local risk induces a strictly higher growth rate. This shows that interdependence of risk and population structure have important implications in a continuous-time setting, and that natural selection induces individuals to prefer local risk.

Suggested Citation

  • Heller, Yuval & Robson, Arthur, 2019. "Evolution and Preference for Local Risk," MPRA Paper 95264, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:95264
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    References listed on IDEAS

    as
    1. Duffie, Darrell & Sun, Yeneng, 2012. "The exact law of large numbers for independent random matching," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1105-1139.
    2. Arthur J. Robson & Larry Samuelson, 2009. "The Evolution of Time Preference with Aggregate Uncertainty," American Economic Review, American Economic Association, vol. 99(5), pages 1925-1953, December.
    3. Robson, Arthur J. & Samuelson, Larry, 2019. "Evolved attitudes to idiosyncratic and aggregate risk in age-structured populations," Journal of Economic Theory, Elsevier, vol. 181(C), pages 44-81.
    4. Robatto, Roberto & Szentes, Balázs, 2017. "On the biological foundation of risk preferences," Journal of Economic Theory, Elsevier, vol. 172(C), pages 410-422.
    5. 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.
    6. Yuval Heller, 2014. "Overconfidence and Diversification," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 134-153, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Risk preferences; evolution; risk interdependence; long-run growth rate.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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