Behavioral biases and the representative agent
Jouini, Elyès; Napp, Clotilde (2012-07), Behavioral biases and the representative agent, 35th Seminar of the European Group of Risk and Insurance Economics, 2008-09, Toulouse, France
TypeCommunication / Conférence
Conference title35th Seminar of the European Group of Risk and Insurance Economics
MetadataShow full item record
Abstract (EN)In this note, we consider an economy with heterogeneous agents, differing by their time preference rate and by their beliefs. We show that at the Pareto optimum, the representative agent exhibits interesting behavioral properties. More precisely, starting from a standard model with expected utility maximizers and exponential discounting, but allowing for heterogeneity among agentsí beliefs and time preference rates, we obtain at the representative agent level an inverse S-shaped probability distribution weighting function and hyperbolic discounting. We provide possible interpretation and applications for this result.
Subjects / KeywordsBehavioral agent; representative agent; neurofinance; Probability Weighting Function; Hyperbolic Discounting
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