Evolution as a risk-averse investor

DanielBernoulliI don’t know about you, but most of my money is in my savings account and not in more volatile assets like property, bonds, or stocks. This is a consequence of either laziness to explore my options, or — the more comforting alternative — extreme risk-aversion. Although it would be nice to have a few thousand dollars more to my name, it would be devastating to have a few thousand dollars less. As such if I was given a lottery where I had a 50% chance of loosing $990 or a 50% chance of winning $1000 then I would probably choose not to play, even though there is an expected gain of $10; I am risk averse, the extra variance of the bet versus the certainty of maintaining my current holdings is not worth $10 for me. I most cases, so are most investors, although the degree of expected profit to variance trade-off differs between agents.

Daniel Bernoulli (8 February 1700 – 17 March 1782) was one of the mathematicians in the famous Bernoulli family of Basal, Switzerland, and contemporary and friend of Euler and Goldbach. He is probably most famous for Bernoulli’s principle in hydrodynamics that his hyper-competitive father Johann publishing in a book he pre-dated by ten years to try and claim credit. One of Daniel’s most productive times was working alongside Euler and Goldbach in the golden days (1724-1732) of the St. Petersburg Academy. It was in Russia that he developed his solution to the St. Petersburg paradox by introducing risk-aversion, and made his contribution to probability, finance, and — as we will see — evolution.
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