Abstract
The standard axiomatic theory of rationality posits that agents order preferences according to the average utilities associated with the different choices. Expected Utility Theory has repeatedly failed as a predictive theory of the choice behavior, as reflected in the enormous new literature in behavioral economics. A frequent thread in this literature is that apparently irrational behaviors in contemporary contexts may have once served important functions, but there has been little attempt to formalize the relationship between evolutionary fitness and choice behavior. Biological agents should maximize fitness, but fitness itself is not a reasonable choice variable since its time-scale exceeds the lifespan of the decision-maker. Consequently, organisms use proximate motivational systems that work on appropriate time-scales and are amenable to feedback and learning. We develop an evolutionary principal-agent model in which individuals maximize a set of proximal choice variables, the interests of which are aligned with fitness. We show that age-specific demographic rates can be used as choice variables. The solution to our model yields probability weightings similar to Cumulative Prospect Theory and Rank-Depended Expected Utility Theory. The pessimistic probability weighting characteristic of these models emerges naturally in an evolutionary framework because of extreme intolerance to zeros in multiplicative growth processes. We show that even under a model of constant absolute risk aversion for choice variables at the proximate level, agents are highly risk-averse at the lowest levels of consumption and suggest a consistency with empirical research on the risk preferences of the poor.
