Whenever you take a risk in real life the outcome will take time to manifest. Until then some of the desicions you will have to face might depend on that outcome which will increase the computational power needed to calculate expected utiltiy and make the desicion. Since our computational power is limited it might be rational to keep these complications at a minimum, therfore risk aversion.
There is one important detail about the computational power. Risk today increases computational power for evaluating tomorrow’s risk. But also the possibility of risks tomorrow becoming entangled with today’s decision increases computational power for evaluating today’s risk.
The real utility of today’s risk is probably smaller than it seems when we evaluate the risk as an isolated event. Risk aversion may be a heuristic to improve our estimates.
I added my own formulation on it (in my comment below), because it’s not just the computing power, but also the loss of knowledge—even with lots of computing power, there is a cost (and yes it’s higher for us humans with limited computing power).
But yes I should have put the summary/abstract on top, and I know did, thanks for the suggestion (from you and others).
Summary of the article:
Whenever you take a risk in real life the outcome will take time to manifest. Until then some of the desicions you will have to face might depend on that outcome which will increase the computational power needed to calculate expected utiltiy and make the desicion. Since our computational power is limited it might be rational to keep these complications at a minimum, therfore risk aversion.
There is one important detail about the computational power. Risk today increases computational power for evaluating tomorrow’s risk. But also the possibility of risks tomorrow becoming entangled with today’s decision increases computational power for evaluating today’s risk.
The real utility of today’s risk is probably smaller than it seems when we evaluate the risk as an isolated event. Risk aversion may be a heuristic to improve our estimates.
Can we put that at the top of the article, please?
I added my own formulation on it (in my comment below), because it’s not just the computing power, but also the loss of knowledge—even with lots of computing power, there is a cost (and yes it’s higher for us humans with limited computing power).
But yes I should have put the summary/abstract on top, and I know did, thanks for the suggestion (from you and others).