Economic Analysis with Systematically Biased Agents

Mark Schneider

Working Papers from Chapman University, Economic Science Institute

Abstract: A tenet of behavioral economics is that biases are systematic and should have visible effects in economic applications. Expected utility maximization has been widely applied in economic analysis, but progress has been slower incorporating 'systematically biased' agents into applications involving risk. This contrasts with the widespread application of present-biased preferences in intertemporal settings. To address this gap, we advocate a model of quasi-rank dependent probability weighting as a natural analog to quasi-hyperbolic discounting for decisions under risk. The model satisfies stochastic dominance and transitivity and transforms individual rather than cumulative probabilities. We illustrate the model’s tractability in several economic applications.

Keywords: Rank dependent utility; Quasi-hyperbolic discounting; Behavioral Biases (search for similar items in EconPapers)
JEL-codes: D03 D81 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:16-28

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