Risk and Evolution

I examine a Knightian model of entrepreneurial risk and investment where in addition to the self-selection process for choosing entrepreneurs, there is an evolutionary selection process over the representation of various risk attitudes. Under a standard evolutionary dynamic, rather than converging to a population of risk-neutrals (fitness maximizers), the population converges to a stationary distribution where both risk- averse and risk-loving types are represented and where only the risk- loving types invest. Many types are represented in stationary population distributions because an evolutionary market environment protects and encourages diversity with different types specializing in different activities and in the steady state each type earns, on average, the same objective payoff.