Research Lecture: Evolutionary Foundations of Economic Behavior, Bounded Rationality, and Intelligence

Andrew Lo
Massachusetts Institute of Technology

Rational economic behavior in which individuals maximize their own self-interest is only one of many possible types of behavior that arise from natural selection. Given an initial population of individuals, each assigned a purely arbitrary behavior with respect to a binary choice problem, and assuming that offspring behave identically to their parents, only those behaviors linked to reproductive success will survive, and less successful behaviors will disappear exponentially fast. This framework yields a single evolutionary explanation for the origin of several behaviors that have been observed in organisms ranging from bacteria to humans, including risk-sensitive foraging, risk aversion, loss aversion, probability matching, randomization, and diversification. The key to understanding which types of behavior are more likely to survive is how behavior affects reproductive success in a given population’s environment. From this perspective, intelligence is naturally defined as behavior that increases the likelihood of reproductive success, and bounds on rationality are determined by physiological and environmental constraints.

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