Hierarchical Evolutionary Preferences Explain Discrepancies in Expected Utility Theory

Abstract

The standard axiomatic theory of rationality posits that agents order preferences according to the average utilities associated with different choices. Expected Utility Theory has repeatedly failed as a predictive theory of choice behavior, as reflected in a growing literature in behavioral economics. Evolutionary theorists have suggested that seemingly 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 optimize fitness, but fitness itself is not a reasonable value function for decision-making 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 (age-specific demographic rates), the interests of which are aligned with fitness. The solution to our model yields pessimistic probability weightings compatible with the Rank-Dependent Expected Utility family of choice models. The pessimistic probability weighting characteristic of these models emerges naturally in an evolutionary framework because of extreme intolerance to zeros in multiplicative growth processes.