Evolutionary Foundation for Heterogeneity in Risk Aversion
20 Pages Posted: 18 Oct 2021 Last revised: 1 Nov 2021
Date Written: October 17, 2021
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
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