The Evolutionary Foundation of Probability Weighting and Hyperbolic Discounting

Abstract

In this paper, we delve into the evolutionary foundation of both probability weighting and hyperbolic discounting. It is argued that it is evolution which selects between various kinds of people those who have the optimal preference profile. As such, utility functions and behavioural biases can be explained from an evolutionary perspective. It is also argued that there may be an intimate connection between hyperbolic discounting and probability weighting. This follows from the similarities between these two deviations from what normative economic theory would consider 'rational'. Following the suggestion of this intimate connection, we analyse a model which is capable of explaining why probability weighting may have been advantageous for our ancestors and we look whether we can reinterpret this model to also include hyperbolic discounting. This turns out to be difficult, however, as an analysis of the properties of the model makes clear.

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