An Evolutionary Perspective on Updating Risk and Ambiguity Preferences

69 Pages Posted: 31 Dec 2019

See all articles by Todd Sarver

Todd Sarver

Duke University - Department of Economics

Philipp Sadowski

Duke University - Department of Economics

Date Written: December 8, 2019

Abstract

Using an approach based on evolution and adaptation, we provide foundations for a model of choice under uncertainty based on adaptive preferences, and we show that updating of those preferences in response to new information will respect dynamic consistency even at the cost of violating consequentialism. We argue that our approach can be applied in most contexts with ambiguity, and we establish that adaptive preferences nest variants of many models in the literature on risk and ambiguity as special cases. Since models of either ambiguity aversion or non-expected utility for risk cannot satisfy both dynamic consistency and consequentialism without strong assumptions on beliefs and information structures, our results add a novel perspective to the discourse about which of these properties should be maintained in applications. In addition, a central feature of adaptive preferences and the models they nest is a tight connection between ambiguity attitudes and violations of expected utility in the context of risk.

Keywords: evolution of preferences, ambiguity, updating, dynamic consistency, phenotypic flexibility

JEL Classification: D81, D83, D84

Suggested Citation

Sarver, Todd and Sadowski, Philipp, An Evolutionary Perspective on Updating Risk and Ambiguity Preferences (December 8, 2019). Available at SSRN: https://ssrn.com/abstract=3501170 or http://dx.doi.org/10.2139/ssrn.3501170

Todd Sarver (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Philipp Sadowski

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1800 (Phone)

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