Evolution, Local Risk and Skewness Loving

Abstract

Our understanding of risk preferences can be sharpened by considering their evolutionary basis. The existing literature has focused on two sources of risk: idiosyncratic risk and aggregate risk. We introduce a new source of risk—heritable risk—in which there is a positive correlation between the fitness of a newborn agent and the fitness of her parent. Heritable risk was plausibly common in our evolutionary past and it leads to a strictly higher growth rate than the other sources of risk. We show that the presence of heritable risk in the evolutionary past may explain the tendency of people to exhibit skewness loving today.