An evolutionary perspective on goal seeking and s-shaped utility

Yoram Hamo, Aviad Heifetz

Research output: Working paper

Abstract

Maximizing the probability of bypassing an aspiration level, and taking increasing risks to recover previous losses are well-documented behavioral tendencies. They are compatible with individual utility functions that are S-shaped, as
suggested in Prospect Theory (Kahneman and Tversky 1979). We explore evolutionary foundations for such preferences. Idiosyncratic innovative activity, while individually risky, enhances the fitness of society because it provides hedging against aggregate disasters that might occur if everybody had pursued the same course of action. In order that individuals choose the socially optimal dosage of innovative activity, the individuals’ preferences should make them strive to improve upon the on-going convention, even if it implies taking gambles that reduce their expected achievements. We show how, in a formal model, the preferences that will be selected for in the course of evolution lead to maximizing the probability of bypassing an aspiration level. Furthermore, when comparing choices with the same probability of achieving this goal, preference is indeed established by maximizing the expected utility of an S-shaped utility function — exhibiting risk loving below the aspiration level and risk aversion beyond it.
Original languageAmerican English
Place of PublicationTel Aviv
PublisherTel Aviv University
Number of pages19
StatePublished - 2001

Publication series

NameTel-Aviv University working paper
PublisherCiteseer

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