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A bias aggregation theorem

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  • Schneider, Mark

Abstract

In a market where some traders are rational (maximize expected utility) and others are systematically biased (deviate from expected utility due to some bias parameter, θ), do equilibrium prices necessarily depend on θ? Focusing on the case where there is an aggregate and systematic bias in the population, we show that market prices can still be unbiased. Hence, we establish that systematically biased agents do not necessarily imply biased market prices.

Suggested Citation

  • Schneider, Mark, 2020. "A bias aggregation theorem," Economics Letters, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303529
    DOI: 10.1016/j.econlet.2020.109584
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    References listed on IDEAS

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    1. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, vol. 91(3), pages 425-429, June.
    2. Chateauneuf, Alain & Eichberger, Jurgen & Grant, Simon, 2007. "Choice under uncertainty with the best and worst in mind: Neo-additive capacities," Journal of Economic Theory, Elsevier, vol. 137(1), pages 538-567, November.
    3. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," IZA Discussion Papers 2092, Institute of Labor Economics (IZA).
    4. Schmidt, Ulrich, 2000. "The certainty effect and boundary effects with transformed probabilities," Economics Letters, Elsevier, vol. 67(1), pages 29-33, April.
    5. Lionel Page & Robert T. Clemen, 2013. "Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?-super-," Economic Journal, Royal Economic Society, vol. 123(568), pages 491-513, May.
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    More about this item

    Keywords

    Risk aversion; Expected utility; Bias aggregation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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