4:00 pm Wednesday, October 22, 2014
Math/ICES/IROM Seminar: Evolutionary Origins of Behavioral Biases in Economics and Finance by Andrew W. Lo (MIT) in POB 6.304
Given an initial population of individuals, each assigned a purely arbitrary behavior with respect to a binary choice problem, and assuming that offspring behave identically to their parents, only those behaviors linked to reproductive success will survive, and less reproductively successful behaviors will disappear at exponential rates. This simple evolutionary model is capable of generating several behaviors that have been observed in organisms ranging from ants to human subjects, including risk-sensitive foraging, risk aversion, loss aversion, probability matching, randomization, and diversification. Moreover, when the uncertainty in reproductive success is systematic, natural selection yields behaviors that may be individually sub-optimal but are optimal from the population perspective; when reproductive uncertainty is idiosyncratic, the individual and population perspectives coincide. This framework generates a surprisingly rich set of behaviors, and the simplicity and generality of our model suggest that these derived behaviors are primitive and nearly universal within and across species. (based on joint work with Thomas J. Brennan and Ruixun Zhang) Submitted by
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