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Cognitive biases and the representative agent

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Date
2009
Publisher city
Paris
Collection title
Preprints Ceremade
Link to item file
https://halshs.archives-ouvertes.fr/halshs-00488570
Dewey
Economie financière
Sujet
ambiguity aversion; behavioral agent; hyperbolic discounting; probability weighting function; representative agent; neurofinance
JEL code
D.D8.D81
URI
https://basepub.dauphine.fr/handle/123456789/16972
Collections
  • CEREMADE : Publications
Metadata
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Author
Jouini, Elyès
Napp, Clotilde
Type
Document de travail / Working paper
Item number of pages
41
Abstract (FR)
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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