Lionel Page (Queensland)

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Elizabeth Bowman

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“If you can, you must." The Evolutionary Foundation of Reference Point Choice and Loss Aversion

In the present paper, we address the following questions: how and why do individuals set reference points and how do these reference points influence the individuals' satisfaction and behaviour? In particular, we seek to explain why individuals are loss averse relative to their set reference point. Our approach is to consider individuals as endowed with an innate subjective reward system shaped by evolution to motivate them to make the best decisions in terms of fitness. This reward system helps the agent make the best choice by pointing to which option has the highest fitness level in a given situation. We show that this reward system induces the agent to set goals suited to the agent’s possibilities. Goals induce an asymmetric S-shape value function exhibiting loss aversion around a reference point. This shape is the optimal solution to incentivise individuals to do as well as they can, given the circumstances they face.