Behavioral biases and representative agent

Elyès Jouini () and Clotilde Napp

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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.

Keywords: Behavioral agent; probability weighting function; representative agent (search for similar items in EconPapers)
Date: 2012-07-02
New Economics Papers: this item is included in nep-evo, nep-gth, nep-mic and nep-upt
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00550229v1
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Published in Theory and Decision, 2012, 73 (1), pp.97-123. ⟨10.1007/s11238-011-9274-3⟩

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Journal Article: Behavioral biases and the representative agent (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00550229

DOI: 10.1007/s11238-011-9274-3

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