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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

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Type
Communication / Conférence
Date
2012-07
Conference title
35th Seminar of the European Group of Risk and Insurance Economics
Conference date
2008-09
Conference city
Toulouse
Conference country
France
Pages
28
Metadata
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Author(s)
Jouini, Elyès
Napp, Clotilde cc
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 / Keywords
Behavioral agent; representative agent; neurofinance; Probability Weighting Function; Hyperbolic Discounting
JEL
G11 - Portfolio Choice; Investment Decisions
D81 - Criteria for Decision-Making under Risk and Uncertainty
D84 - Expectations; Speculations
D87 - Neuroeconomics
H43 - Project Evaluation; Social Discount Rate