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Behavioral biases and representative agent

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Author Info

  • Elyès Jouini

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

  • Clotilde Napp

    (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)

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.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00550229.

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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
Handle: RePEc:hal:journl:halshs-00550229

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00550229
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Web page: http://hal.archives-ouvertes.fr/

Related research

Keywords: Behavioral agent; probability weighting function; representative agent;

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Cited by:
  1. 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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