Behavioral biases and representative agent

Elyès Jouini (1) , Clotilde Napp (2, 3)

1 CEREMADE - CEntre de REcherches en MAthématiques de la DEcision
2 CREST - Centre de Recherche en Économie et Statistique
3 DRM - Dauphine Recherches en Management

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.

Mots clés: Behavioral agent; probability weighting function; representative agent

Domaines: Economies et finances

Elyès Jouini, Clotilde Napp. Behavioral biases and representative agent. Theory and Decision, 2012, 73 (1), pp.97-123. ⟨10.1007/s11238-011-9274-3⟩. ⟨halshs-00550229⟩