Evolutionary Foundation for Heterogeneity in Risk Aversion

20 Pages Posted: 18 Oct 2021 Last revised: 1 Nov 2021

See all articles by Yuval Heller

Yuval Heller

Bar Ilan University

Ilan Nehama

Bar-Ilan University

Date Written: October 17, 2021

Abstract

We examine evolutionary basis for risk aversion with respect to aggregate risk. We study populations in which agents face choices between aggregate risk and idiosyncratic 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 aggregate risk and obtaining its linear and harmonic mean for sure, respectively. Moreover, an 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.

Keywords: Evolution of preferences, risk interdependence, long-run growth rate

JEL Classification: D81

Suggested Citation

Heller, Yuval and Nehama, Ilan, Evolutionary Foundation for Heterogeneity in Risk Aversion (October 17, 2021). Available at SSRN: https://ssrn.com/abstract=3942389 or http://dx.doi.org/10.2139/ssrn.3942389

Yuval Heller (Contact Author)

Bar Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 5290002
Israel
+972 5252 82182 (Phone)

HOME PAGE: http://https://sites.google.com/site/yuval26/

Ilan Nehama

Bar-Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 52900
Israel

HOME PAGE: http://https://sites.google.com/mail.huji.ac.il/ilan-nehama

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