M.Sc. Thesis, 29-05-2012: "The Evolutionary Foundation of Probability Weighting and Hyperbolic Discounting and Their Intimate Connection
During my Master's programme at Lund University
, in Sweden, I wrote my Master's Thesis in Economics on the evolutionary foundation of two aspects of behavioural economics, and of Prospect Theory in particular: probability weighting and hyperbolic discounting. This research paper was supervised by Prof. Dr. Jerker Holm
. In particular, I examined a model which showed how probability weighting may be evolutionarily advantageous. I extended on this model by allowing for a richer variety of weighting and by combining different sub-games within a larger model. I found that the only type of weighting which survived the evolutionary process was the one which agreed with empirical data. In my research, I also suggested that there may be an intimate connection between probability weighting and hyperbolic discounting, as there are many similarities between the two behaviours. I examined how the previous model for probability weighting could be reinterpreted to include hyperbolic discounting and found that certain properties, such as the credible threat, were appropriate for reinterpretation while other properties, such as the symmetry between the two strategic choices in the game, were inappropriate for allowing the model to be reinterpreted as one including future discounting.
In this paper, we delve into the evolutionary foundation of both probability weighting and hyperbolic discounting. We argue that it is evolution which selects between various kinds of people those who have the optimal preference profile. As such, utility functions and behavioural biases can be explained from an evolutionary perspective. We also argue that there may be an intimate connection between hyperbolic discounting and probability weighting. This follows from the similarities between these two deviations from what normative economic theory would consider 'rational'. Following the suggestion of this intimate connection, we analyse a model which is capable of explaining why probability weighting may have been advantageous for our ancestors and we look whether we can reinterpret this model to also include hyperbolic discounting. This turns out to be difficult, however, as an analysis of the properties of our model makes clear.
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