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Behavioral Biases and the Representative Agent

Jouini, Elyès; Napp, Clotilde (2012), Behavioral Biases and the Representative Agent, Theory and Decision, 73, 1, p. 97-123. http://dx.doi.org/10.1007/s11238-011-9274-3

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Type
Article accepté pour publication ou publié
Date
2012
Journal name
Theory and Decision
Volume
73
Number
1
Publisher
Springer
Pages
97-123
Publication identifier
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Author(s)
Jouini, Elyès
Napp, Clotilde cc
Abstract (EN)
In this paper, we show that behavioral features can be obtained at a group level when the individuals of the group are heterogeneous enough. More precisely, starting from a standard model of Pareto optimal allocations, with expected utility maximizers and exponential dis- counting, but allowing for heterogeneity among agentsíbeliefs and time preference rates, we show that the representative agent exhibits interesting behavioral properties. In particular, we obtain an inverse S-shaped probability distribution weighting function and hyperbolic discounting. We provide possible interpretation as well as applications for this result.
Subjects / Keywords
Hyperbolic Discounting; Behavioral Agent; Neurofinance; Representative Agent; Probability Weighting Function
JEL
D87 - Neuroeconomics
D03 - Behavioral Microeconomics: Underlying Principles
H43 - Project Evaluation; Social Discount Rate
D84 - Expectations; Speculations
G11 - Portfolio Choice; Investment Decisions
D81 - Criteria for Decision-Making under Risk and Uncertainty