Decision Making under Uncertainty and the Evolution of Interdependent Preferences

This paper finds support for the evolution of interdependent preferences under natural selection from a (perhaps) surprising source: decision making under uncertainty. Individuals choose from sets of risky alternatives. The lotteries may involve either idiosyncratic risk or aggregate uncertainty or both. Robson (J. Econ. Theory 68 (1996), 397 424) gives the evaluation criterion for lotteries that maximizes reproductive value and shows that it does not satisfy the expected utility theorem. Cooper and Kaplan (J. Theoret. Biol. 94 (1982), 135 151) have demonstrated that when lotteries are aggregate, the optimal decision rule involves randomization. This paper reexamines Robson's evaluation criterion, using it to solve for the optimal amount of randomization. The solution is characterized and an interpretation is offered that links maximizing reproductive value to maximizing expected relative offspring. It is shown that when agents' preferences arise from their own offspring relative to the average within the population, a game is constructed out of the choice of lotteries and that the unique Nash equilibrium distribution of actions maximizes reproductive value. Journal of Economic Literature Classification Numbers: C72, D71, D81. 2001 Academic Press