nep-evo New Economics Papers
on Evolutionary Economics
Issue of 2008‒07‒30
three papers chosen by
Matthew Baker
City University of New York

  1. Epistemic Conditions and Social Preferences in Trust Games By Gillies, Anthony S; Rigdon, Mary L
  2. Evolutionary Finance By Igor V. Evstigneev; Thorsten Hens; Klaus Reiner Schenk-Hoppé
  3. The Evolutionary Theory of Time Preferences and Intergenerational Transfers By C.Y. Cyrus Chu; Hung-Ken Chien; Ronald D. Lee

  1. By: Gillies, Anthony S; Rigdon, Mary L
    Abstract: It is well-known that subjects in bilateral bargaining experiments often exhibit choice behavior suggesting there are strong reciprocators in the population. But it is controversial whether explaining this data requires a social preference model that invokes genuine strong reciprocity or whether some social preference model built on other-regarding preferences as a surrogate can explain it. Since the data precedes theory here, all the social preference models agree on most of it — making direct tests more difficult. We report results from a laboratory experiment using a novel method for testing between the classes of social preference models in the trust game that manipulates the distribution of payoff information in the game. We find evidence supporting the strong reciprocity hypothesis.
    Keywords: social preferences; trust game; reciprocity; strong reciprocators
    JEL: C70 C91
    Date: 2008–07–13
  2. By: Igor V. Evstigneev (Economic Studies, University of Manchester); Thorsten Hens (Swiss Banking Institute, University of Zurich); Klaus Reiner Schenk-Hoppé (Leeds University Business School and School of Mathematics, University of Leeds)
    Abstract: Evolutionary finance studies the dynamic interaction of investment strategies in financial markets. This market interaction generates a stochastic wealth dynamics on a heterogenous population of traders through the fluctuation of asset prices and their random payoffs. Asset prices are endogenously determined through short-term market clearing. Investors' portfolio choices are characterized by investment strategies which provide a descriptive model of decision behavior. The mathematical framework of these models is given by random dynamical systems. This chapter surveys the recent progress made by the authors in the theory and applications of evolutionary finance models. An introduction to and the motivation of the modeling approach is followed by a theoretical part which presents results on the market selection (and co-existence) of investment strategies, discusses the relation to the Kelly rule and implications for asset pricing theory, and introduces a continuous-time mathematical finance version. Applications are concerned with simulation studies of the market dynamics, empirical estimation of asset prices and their dynamics, and the evolution of investment strategies using genetic programming.
    Keywords: Evolutionary Finance, Wealth Dynamics, Market Interaction
    JEL: G11 C61 C62
    Date: 2008–05
  3. By: C.Y. Cyrus Chu; Hung-Ken Chien; Ronald D. Lee
    Abstract: At each age an organism produces energy by foraging and allocates this energy among reproduction, survival, growth, and intergenerational transfers. We characterize the optimal set of allocation decisions that maximizes reproductive fitness. Time preference (the discount rate) is derived from the marginal rate of substitution between energy obtained at two different times or ages in an individual’s life, holding reproductive fitness constant. We show that the life history may have an initial immature phase during which there is body growth but no fertility, and a later mature phase with fertility but no growth, as with humans. During the immature phase, time preference depends only on the compounding effect of body growth, much like returns on a capital investment, but not on fertility, or the intrinsic population growth rate. During the mature phase, time preference depends on the costliness of fertility, and on endogenous survival and intrinsic growth rate, and not at all on body growth. During the transition between the two phases, fertility, mortality, body growth, and intrinsic growth rate all matter. Using these results, we conclude that time preference and discount rates are likely to be U-shaped across age. We compare our results to Hansson and Stuart (1990), Rogers (1994, 1997) and Sozou and Seymour (2003). Wastage and inefficiencies aside, in a single sex model a system of intergenerational transfers yields Samuelson’s (1958) biological interest rate equal to the population growth rate. When the rate of time preference exceeds this biological rate, inter- generational transfers will raise fitness and evolve through natural selection, partially smoothing out the age variations in time preference.
    JEL: J1
    Date: 2008–07

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