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Behavioral biases and representative agent

Author

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  • Elyès Jouini

    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • Clotilde Napp

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

In 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.

Suggested Citation

  • Elyès Jouini & Clotilde Napp, 2012. "Behavioral biases and representative agent," Post-Print halshs-00550229, HAL.
  • Handle: RePEc:hal:journl:halshs-00550229
    DOI: 10.1007/s11238-011-9274-3
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00550229
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    4. Philip Millroth & HÃ¥kan Nilsson & Peter Juslin, 2019. "The decision paradoxes motivating Prospect Theory: The prevalence of the paradoxes increases with numerical ability," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 14(4), pages 513-533, July.

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    More about this item

    Keywords

    Behavioral agent; probability weighting function; representative agent;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D87 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Neuroeconomics
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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