
on Evolutionary Economics 
By:  Ray Fisman; Shachar Kariv; Daniel Markovits 
Date:  2005–02–10 
URL:  http://d.repec.org/n?u=RePEc:cla:levrem:666156000000000468&r=evo 
By:  Pavlo R. Blavatskyy 
Abstract:  This paper proposes a new model that explains the violations of expected utility theory through the role of random errors. The paper analyzes decision making under risk when individuals make random errors when they compute expected utilities. Errors are drawn from the normal distribution, which is truncated so that the stochastic utility of a lottery cannot be greater (lower) than the utility of the highest (lowest) possible outcome. The standard deviation of random errors is higher for lotteries with a wider range of possible outcomes. It converges to zero for lotteries converging to a degenerate lottery. The model explains all major stylized empirical facts such as the Allais paradox and the fourfold pattern of risk attitudes. The model fits the data from ten wellknown experimental studies at least as good as cumulative prospect theory. 
Keywords:  decision theory, stochastic utility, expected utility theory, cumulative prospect theory 
JEL:  C91 D81 
URL:  http://d.repec.org/n?u=RePEc:zur:iewwpx:231&r=evo 
By:  Stefan Reimann 
Abstract:  Risk management and asset pricing benefit from simple functional descriptions of the distribution of real asset returns. Recently, several authors have proposed that asset returns in real stock markets are distributed according to a hyperbolic distribution. While asset returns are generated by trades over time, the natural question is: What does economic theory imply concerning return distributions? We propose a simple model of price formation and, thus, return distribution which is based on economic reasoning. The markets behavior is represented by a pair consisting of a timeconstant strategy and a dynamical trading strategy generating a flow between funds. Simulations of the price dynamics generate returns with fattail behavior in line with that of a hyperbolic distribution. 
Keywords:  Asset returns, hyperbolic distribution, evolutionary finance 
JEL:  G12 C51 
URL:  http://d.repec.org/n?u=RePEc:zur:iewwpx:232&r=evo 