Evolutionary theory of economic decisions

Date:
August 11, 2020
Source:
Stanford University
Summary:
When survival over generations is the end game, researchers say
it makes sense to undervalue long shots that could be profitable
and overestimate the likelihood of rare bad outcomes.



FULL STORY ========================================================================== Making decisions in the face of uncertainty has never been easy. But the
global pandemic has raised the stakes for many previously mundane choices:
how to travel, where to get food, when to send kids back to school.


========================================================================== Understanding how humans have made high-stakes decisions over evolutionary
time may help to explain our choices in the present day -- including
our tendency to veer from the preferences predicted by economic models, according to a new study from scholars at Stanford University and the
Santa Fe Institute.

"Rather than starting with utility -- the happiness or value I get out of making my decision now -- let's think about how the brain was constructed
over evolutionary history," said study co-author James Holland Jones,
a biological anthropologist at Stanford's School of Earth, Energy & Environmental Sciences (Stanford Earth). The research was published in
the journal Evolutionary Human Sciences.

The pair's proposal adds a new perspective to long-running scholarly
debates over why practices designed to improve the standard of living
among subsistence populations don't take hold, such as the seemingly slow adoption of new farming technologies among poor, small-scale farmers,
and more recently, the unwillingness of the poorest poor to adopt
microfinance and other development schemes.

"There is an inclination to think of the poorest people as being 'natural entrepreneurs' because they have nothing to lose economically," Jones explained. "However, the evolutionary logic we employ suggests that the
poorest poor have everything to lose and are, in fact, closer to losing
it than better- off people. Our model predicts that very poor people
would be especially risk- averse." It also points to the weakness of
lean systems in the face of uncommon but severe threats, such as the coronavirus. "One of the things we're seeing right now is a world that
has been optimized for efficiency and is extremely vulnerable to risk,"
he said. "If you scale back organizations to keep them running at a mean
level that's high, and you don't have a lot of slack, when a crisis hits
you're in trouble." Rational choices in evolutionary systems


========================================================================== According to the theory of expected utility, a staple of modern economics, people should always carefully weigh the likelihood of an event along
with the prizes or consequences that would accrue from our decision --
and then choose the option with the highest average payoff. Of course,
we rarely calculate these averages in practice, as behavioral economists
have long recognized. Yet an assumption that our brains will behave as if
we made decisions this way - - maximizing personal gain at every turn --
is still baked into many public and economic policies.

"We might expect evolutionary systems to mirror markets, with organisms
that act rationally out-competing those not behaving rationally,"
said Jones, an associate professor of Earth system science at Stanford
Earth and a senior fellow at the Stanford Woods Institute for the
Environment. "The catch is that you can't outcompete something if you're extinct." In addition to influencing policy, business and financial
markets, theories of how we make decisions have filtered into popular
culture through books like NudgeandThinking Fast and Slow. However,
they tend to deal poorly with choices that humans have faced for the vast majority of their history on Earth - - namely, those shaped not by market forces, but by environmental variables like temperature or rainfall. In
this context, boom times can't compensate for a single lethal bust. Just
one bad heat wave, drought, cold snap or flood can leave a household
hungry or worse. "Variance is what drives you to extinction," Jones said.

As a result, when it comes to preferences that evolve by natural
selection, he said, we should expect to see people undervalue long
shots that could be profitable, play it safe when things look risky and generally overestimate the likelihood of rare bad outcomes.

Pessimism pays On the timescale of evolution, the salient outcome of
a decision is how it contributes to fitness, meaning the proportion
of the population through time that carries your DNA. Unlike utility,
fitness is a measure that multiplies over time. "If any generation in
your lineage has zero offspring in it, it's game over," Jones said. "It
is a general aversion to zeros that leads to pessimism."


==========================================================================
At the same time, fitness plays out over such long timescales that it
can't directly influence our behavior. The things that do shape our
choices day to day are more like utility in that they can rise and fall
without bringing catastrophe. "Psychological mechanisms, like satiety
or sexual gratification, or something like love of your children, can
motivate you in the immediate.

They promote fitness in the long run, but they are not the thing actually
being maximized over time," he said.

Maximizing fitness leads us to be more pessimistic in our economic
decisions than utility models predict. The optimal level of pessimism to promote survival depends "on the exact universe the organism occupies,"
the authors write. For example, hunters targeting rare, big game may stand
to bring home more calories if they succeed, but their household could
go hungry if they fail. Herders have to weigh not only the productivity
of their animals, but also their susceptibility to drought and disease.

"Any time where you have to avoid zero, pessimism will pay off, because
you'd rather leave money on the table than run the risk of going extinct," Jones said.

Theory into practice When social distancing restrictions loosen enough
to conduct group experiments, Jones and co-author Michael Price, PhD
'15, who studies complex systems as a fellow at the Santa Fe Institute,
plan to test their theory with games challenging participants to maximize payoffs that multiply over time or that are hidden but associated with
some tangible proxy. By formalizing and eventually testing the theory,
the researchers write, they "hope to stimulate more work on the possible evolutionary foundations of key results from behavioral economics."

========================================================================== Story Source: Materials provided by Stanford_University. Original written
by Josie Garthwaite. Note: Content may be edited for style and length.


========================================================================== Journal Reference:
1. Michael Holton Price, James Holland Jones. Fitness-Maximizers Employ
Pessimistic Probability Weighting for Decisions Under
Risk. Evolutionary Human Sciences, 2020; 1 DOI: 10.1017/ehs.2020.28 ==========================================================================

Link to news story: https://www.sciencedaily.com/releases/2020/08/200811163313.htm

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