Behavioral biases and representative agent
AbstractIn this paper, we show that behavioral features can be obtained at a group level when the individuals of the group are heterogeneous enough. Starting from a standard model of Pareto optimal allocations, with expected utility maximizers but allowing for heterogeneity among individual beliefs, we show that the representative agent has an inverse S-shaped probability distortion function. As an application of this result, we show that an agent with a probability weighting function as in Cumulative Prospect Theory may be represented as a collection of agents with noisy beliefs.
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Date of creation: 02 Jul 2012
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Publication status: Published, Theory and Decision, 2012, 73, 1, 97-123
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Behavioral agent; probability weighting function; representative agent;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-EVO-2011-11-07 (Evolutionary Economics)
- NEP-GTH-2011-11-07 (Game Theory)
- NEP-MIC-2011-11-07 (Microeconomics)
- NEP-UPT-2011-11-07 (Utility Models & Prospect Theory)
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- Bahaji, Hamza, 2014. "Are Employee Stock Option Exercise Decisions Better Explained through the Prospect Theory?," Economics Papers from University Paris Dauphine 123456789/13098, Paris Dauphine University.
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