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Economic Analysis with Systematically Biased Agents

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  • Mark Schneider

    (Economic Science Institute, Chapman University)

Abstract

A tenet of behavioral economics is that biases are systematic and should have visible effects in economic applications. Expected utility maximization has been widely applied in economic analysis, but progress has been slower incorporating 'systematically biased' agents into applications involving risk. This contrasts with the widespread application of present-biased preferences in intertemporal settings. To address this gap, we advocate a model of quasi-rank dependent probability weighting as a natural analog to quasi-hyperbolic discounting for decisions under risk. The model satisfies stochastic dominance and transitivity and transforms individual rather than cumulative probabilities. We illustrate the model’s tractability in several economic applications.

Suggested Citation

  • Mark Schneider, 2016. "Economic Analysis with Systematically Biased Agents," Working Papers 16-28, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:16-28
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    File URL: http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/schneider-qrd-systematic-bias-2016.pdf
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    More about this item

    Keywords

    Rank dependent utility; Quasi-hyperbolic discounting; Behavioral Biases;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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