Abstract
We examine the evolutionary basis for risk aversion with respect to aggregate risk. We study populations in which agents face choices between alternatives with different levels of aggregate risk. We show that the choices that maximize the long-run growth rate are induced by a heterogeneous population in which the least and most risk-averse agents are indifferent between facing an aggregate risk and obtaining its linear and harmonic mean for sure, respectively. Moreover, approximately optimal behavior can be induced by a simple distribution according to which all agents have constant relative risk aversion, and the coefficient of relative risk aversion is uniformly distributed between zero and two.
Original language | English |
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Article number | 105617 |
Journal | Journal of Economic Theory |
Volume | 208 |
DOIs | |
State | Published - Mar 2023 |
Bibliographical note
Publisher Copyright:© 2023 Elsevier Inc.
Funding
We thank the editor (Tilman Börgers), an anonymous referee, and participants at the Neuroeconomics and the Biological Basis of Economics conference at Simon-Fraser University, the Bar-Ilan Game and Economic theory seminar, the 16 th Meeting of the Society for Social Choice and Welfare, and the LEG2022 conference at the IMT School for Advanced Studies (Lucca) for various helpful comments. We gratefully acknowledge the financial support of the European Research Council (# 677057 ), US–Israel Bi-national Science Foundation (# 2020022 ), and Israel Science Foundation (# 2566/20 , # 2443/19 , and # 1626/18 ). We thank the editor (Tilman Börgers), an anonymous referee, and participants at the Neuroeconomics and the Biological Basis of Economics conference at Simon-Fraser University, the Bar-Ilan Game and Economic theory seminar, the 16th Meeting of the Society for Social Choice and Welfare, and the LEG2022 conference at the IMT School for Advanced Studies (Lucca) for various helpful comments. We gratefully acknowledge the financial support of the European Research Council (#677057), US–Israel Bi-national Science Foundation (#2020022), and Israel Science Foundation (#2566/20, #2443/19, and #1626/18).
Funders | Funder number |
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Society for Social Choice and Welfare | |
US-Israel bi-national Science Foundation | 2020022 |
European Commission | 677057 |
Israel Science Foundation | 2566/20, 1626/18, 2443/19 |
Simon Fraser University |
Keywords
- Evolution of preferences
- Long-run growth rate
- Risk interdependence