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Type	Working Paper
Scope	Discipline-based scholarship
Title	Probability Weighting as Evolutionary Second-best
Organization Unit	Microeconomics (Nick Netzer)
Authors	Florian Herold Nick Netzer
Language	English
Institution	University of Zurich
Series Name	Working paper series / Socioeconomic Institute
Number	No. 1005
Date	2011
Abstract Text	The economic concept of the second-best involves the idea that multiple simultaneous deviations from a hypothetical first-best optimum may be optimal once the first-best itself can no longer be achieved, since one distortion may partially compensate for another. Within an evolutionary framework, we translate this concept to behavior under uncertainty. We argue that the two main components of prospect theory, the value function and the probability weighting function, are complements in the second-best sense. Previous work has shown that an adaptive S-shaped value function may be evolutionary optimal if decision-making is subject to cognitive or perceptive constraints. We show that distortions in the way probabilities are perceived can further enhance fitness. The second-best optimum involves overweighting of small and underweighting of large probabilities. Behavior as described by prospect theory might therefore be evolution's second-best solution to the fitness maximization problem. We discuss under which circumstance our model makes empirically testable predictions about the relation between individuals' value and probability weighting functions.
Free access at	Official URL
Official URL	http://www.soi.uzh.ch/research/wp/2010/wp1005.pdf
Related URLs	http://www.econ.uzh.ch/wp.html https://doi.org/10.1016/j.geb.2022.12.005 https://www.zora.uzh.ch/id/eprint/227308/
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Keywords	Probability Weighting, Prospect Theory, Evolution of Preferences
Additional Information	Revised version