On Aggregability of Risk Averse and Risk Seeking Preferences into One Representative Agent

Abstract

This study provides formal theoretical evidence for nesting of probability measures that are generated by risk aversion in probability measures that are generated by risk seeking preferences. In presence of highlighted nesting, conditional on independent parameterization of expectations (probability distributions) that are conditioned on either of risk aversion, or risk seeking preferences, the two sets of preferences aggregate into one representative agent. This is a novel result that simultaneously is not trivial. Non-triviality is evident in the accompanying prediction that formation of expectations (probability distributions) over entirety of assets within stock markets, this without recourse to heterogeneity of preferences, does not induce existence of a single representative agent. The formal theoretical evidence demonstrates that the value-growth anomaly - the superior return performance of `value' stocks in relation to `growth' stocks - is induced by deviations from rational expectations equilibriums, as such lacks characterization as an anomaly.

Keywords: Risk, Return, Probability Measure, Stock Market, Probability Distribution, Equilibrium

JEL Classification: G11, C00, D53, D81