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Cognitive biases and the representative agent

  • Elyès Jouini


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

  • Clotilde Napp

    (DRM - Dauphine Recherches en Management - CNRS - Université Paris IX - Paris Dauphine)

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 and exponential discounting, but allowing for heterogeneity among individual beliefs and individual time preference rates, we show that the representative agent has an inverse S-shaped probability distortion function and hyperbolic discount rates. As an application of this result, we show that an agent with a probability weighting function as in Cumulative Prospect Theory (resp. an ambiguity averse agent, resp. an hyperbolic discounting agent) may be represented as a collection of agents with noisy beliefs (resp. heterogeneous beliefs, resp. heterogeneous constant discount rates).

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Paper provided by HAL in its series Working Papers with number halshs-00488570.

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Date of creation: 2009
Date of revision:
Handle: RePEc:hal:wpaper:halshs-00488570
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  1. Diego Nocetti & Elyès Jouini & Clotilde Napp, 2008. "Properties of the Social Discount Rate in a Benthamite Framework with Heterogeneous Degrees of Impatience," Post-Print halshs-00365980, HAL.
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  8. Ely�s Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
  9. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  10. Elyès Jouini & Jean-Michel Marin & Clotilde Napp, 2010. "Discounting and Divergence of Opinion," Post-Print halshs-00176636, HAL.
  11. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
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  13. Chateauneuf, Alain & Cohen, Michele, 1994. "Risk Seeking with Diminishing Marginal Utility in a Non-expected Utility Model," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 77-91, July.
  14. Yvan Lengwiler, 2005. "Heterogeneous Patience and the Term Structure of Real Interest Rates," American Economic Review, American Economic Association, vol. 95(3), pages 890-896, June.
  15. repec:oup:restud:v:64:y:1997:i:1:p:147-50 is not listed on IDEAS
  16. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  17. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  18. Isabelle Brocas & Juan D. Carrillo, 2008. "The Brain as a Hierarchical Organization," American Economic Review, American Economic Association, vol. 98(4), pages 1312-46, September.
  19. Landsberger, Michael & Meilijson, Isaac, 1990. "Demand for risky financial assets: A portfolio analysis," Journal of Economic Theory, Elsevier, vol. 50(1), pages 204-213, February.
  20. repec:oup:qjecon:v:110:y:1995:i:3:p:585-603 is not listed on IDEAS
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