Examining financial puzzles from an evolutionary perspective
Name
68907019-MIT.pdf
Description
Full printable version
Size
5.3 MB
Format
Adobe PDF
Checksum (MD5)
47a0eef6c7331b97f0130f2c032bb485
Author(s)
Guo, Kenrick
Advisor(s)
Andrew W. Lo.
Date Issued
2006
Publisher
Massachusetts Institute of Technology
Abstract
In this thesis, we examine some puzzles in finance from an evolutionary perspective. We first provide a literature review of evolutionary psychology, and discuss three main findings; the frequentist hypothesis, applications from risk-sensitive optimal foraging theory, and the cheater detection hypothesis. Next we introduce some of the most-researched puzzles in the finance literature. Examples include overreaction, loss aversion, and the equity premium puzzle. Following this, we discuss risk-sensitive optimal foraging theory further and examine some of the financial puzzles using the framework of risk-sensitive foraging. Finally, we develop a dynamic patch selection model which gives the patch selection strategy that maximizes an organism's long-run probability of survival. It is from this optimal patch strategy that we observe loss aversion. Throughout the thesis, we stress the following: humans' behavior in financial markets is neither inherently irrational, nor is it rational. Rather the puzzles occur as a consequence of evolutionarily-optimal cognitive mechanisms being utilized in environments other than the ancestral domain in which they evolved to adapt in.
Description
Thesis (S.M.)--Massachusetts Institute of Technology, Sloan School of Management, Operations Research Center, 2006.
Includes bibliographical references (leaves 74-79).
Subjects
Operations Research Center.
MIT Department
Massachusetts Institute of Technology. Operations Research Center
Sloan School of Management
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