Thesis (S.M.)--Massachusetts Institute of Technology, Sloan School of Management, Operations Research Center, 2006. / Includes bibliographical references (leaves 74-79). / 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. / by Kenrick Guo. / S.M.
| Identifer | oai:union.ndltd.org:MIT/oai:dspace.mit.edu:1721.1/34147 |
| Date | January 2006 |
| Creators | Guo, Kenrick |
| Contributors | Andrew W. Lo., Massachusetts Institute of Technology. Operations Research Center., Massachusetts Institute of Technology. Operations Research Center. |
| Publisher | Massachusetts Institute of Technology |
| Source Sets | M.I.T. Theses and Dissertation |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | 79 leaves, 5551751 bytes, 5554999 bytes, application/pdf, application/pdf, application/pdf |
| Rights | M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission., http://dspace.mit.edu/handle/1721.1/7582 |
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