An evolutionary explanation of the Allais paradox

Moshe Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

The Allais paradox constitutes a central violation of the expected utility paradigm. The paradox is typically explained by subjective probability weighing, and has motivated and shaped the leading non-expected-utility models. But why do people weigh probabilities? We suggest a new explanation for the Allais paradox based on evolutionary theory. We show that the evolutionary goal of maximizing the probability of having descendants forever (i.e. minimizing the probability of eventual extinction) predicts the Allais paradox and the common-consequence and common-ratio effects, and thus provides a rational-expectations theoretical foundation for the experimentally observed behavior.

Original languageAmerican English
Pages (from-to)1545-1574
Number of pages30
JournalJournal of Evolutionary Economics
Volume32
Issue number5
DOIs
StatePublished - Nov 2022

Bibliographical note

Publisher Copyright:
© 2022, The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature.

Keywords

  • Allais paradox
  • Common-consequence effect
  • Common-ratio effect
  • Evolution
  • Extinction
  • Having-descendants-forever
  • Risk preferences

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