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

Abstract

This study establishes conditions in context of which risk aversion is aggregable with risk seeking preferences for arrival at a `composite' representative agent. Absent modeling of wealth, risk aversion is associated with lesser priced assets, and risk seeking with higher priced assets, resulting in feasibility of progressiveness of transition from risk aversion to risk seeking preferences, and parameterization of the risk preference continuum by what is termed, `Preference-constrained Markowitz Stochastic Dominance (PMSD)'. Consistent with Post and Levy (2005), in presence of rationality of demand for portfolio risk diversification, preference for the market portfolio only is rationalized by PMSD.

Keywords: Rational Expectations, Probability Measure, Stochastic Dominance, Qualitative Probability Ordering, Price Equilibriums, Value-Growth Anomaly

JEL Classification: G11, C00, D53, D81