Prospect Theory's Roots in Evolutionary Biology
by Ryan Petersen
Prospect Theory asserts that humans value gains and losses relative to a reference point, and that the pain of losses is greater than the joy of proportional gains (see graph at right). Empirical evidence has proven the theory to be an extremely accurate description of human behavior.
Once we know that this theory does in fact describehuman behavior, the next logical question is to ask why we act this way? And as usual, evolutionary biology shows the way.
Prospect Theory asserts that humans value gains and losses relative to a reference point, and that the pain of losses is greater than the joy of proportional gains (see graph at right). Empirical evidence has proven the theory to be an extremely accurate description of human behavior.
Once we know that this theory does in fact describe
The above curve for the relative values of gains and losses in prospect theory can be explained by our animal past in a world like this:
There is only one good (calories, instead of money) and your primate ancestor starts out at a certain reference point some level above the minimum needed for survival. Throughout most of human evolution, given the small population numbers before the rise of agriculture, its reasonable to assume that we were only marginally above that survival level.
Any gain in calories would provide value for gene replication, as you could share them with members of your tribe who share your DNA, or even use the goods to induce a member of the opposite sex to engage in intercourse with you. On the other hand, should your stock of calories fall below a certain threshold, you perish. The outcome of any action would now need to be weighted not only for its net effect on your hoard of calories, but also for how close it brings you to the death threshold. The risk of death would depend on how far above that threshold your current stock of calories leaves you. Clearly the consequences of of death to your genes ability to replicate would be FAR greater than the benefits to gene replication provided by a proportional gain. So losses when you are close to that threshold (your standard starting point in the harsh primordial world) are valued far more strongly than gains.
Labels: economics, evolution, evolutionary biology, prospect theory
posted by Ryan Petersen @ 10:19 AM
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1 Comments:
This is all BS by the way, I have no idea how to use principles of evolutionary biology to prove prospect theory or anything else...
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