Behavioral biases and the representative agent

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Theory and Decision 73 (1):97-123 (2012)
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Abstract

In this article, we show that behavioral features can be obtained at a group level even if they do not appear at the individual level. Starting from a standard model of Pareto optimal allocations, with expected utility maximizers but allowing for heterogeneity among individual beliefs, we show in particular that the representative agent has an inverse S-shaped probability distortion function as in Cumulative prospect theory.

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10.1007/s11238-011-9274-3

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The probability weighting function.Drazen Prelec - 1998 - Econometrica 66 (3):497–527.

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