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Updated: Nov 1, 2025
13:04
Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods
Published on: September 19, 2012
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Evolved attitudes to risk and the demand for equity.
Arthur J Robson1, H Allen Orr2
1Department of Economics, Simon Fraser University, Burnaby, BC V5A 1S6, Canada; robson@sfu.ca.
Summary
Evolutionary history may explain the equity premium puzzle by shaping risk aversion. A biological predisposition to avoid aggregate risk, rather than individual risk, influences investment decisions.
Area of Science:
- Behavioral Economics
- Evolutionary Psychology
- Finance
Background:
- The equity premium puzzle describes the observed low investment in stock markets compared to theoretical expectations based on risk aversion.
- Existing economic models struggle to reconcile observed risk-taking behaviors with stock market participation.
Purpose of the Study:
- To investigate the hypothesis that evolutionary pressures have shaped human risk attitudes, potentially explaining the equity premium puzzle.
- To model how natural selection might favor differential aversion to aggregate versus idiosyncratic risk.
Main Methods:
- Development of a simple evolutionary model to simulate the long-term effects of natural selection on risk aversion.
- Application of the evolutionary model within both static portfolio choice and dynamic intertemporal tradeoff frameworks.
Main Results:
- The evolutionary model predicts that natural selection favors greater aversion to aggregate risk over idiosyncratic risk.
- This biologically derived aversion to aggregate risk, when applied to investment models, helps explain the equity premium puzzle.
Conclusions:
- Human risk attitudes, shaped by evolutionary history, can provide a biological explanation for the equity premium puzzle.
- Investors exhibiting this evolutionary-influenced risk aversion would logically invest less in equities than predicted by non-evolutionary models.
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