Heterogeneous probabilities in complete asset markets (Q4936387)

The authors investigate the possible benefits of heterogeneity in complete asset markets. They consider a standard one-period portfolio selection problem where agents maximize the expected utility \(\sum_{s}\pi_{s}u(y_{s})\) in which \(y_{s}\) is the income in the state \(s\) and \(\pi_{s}\) is the subjective probability. They focus on heterogeneity of the subjective probability \(\pi_{s}.\) It is shown that heterogeneity in the distribution of individual subjective probabilities generates aggregate expenditures for the so-called Arrow-Debreu securities that are less sensitive to variations of their process when income is price-independent. For this heterogeneity has to be highest among agents who have the largest relative degrees of risk aversion. For the entire collection see [Zbl 0909.00060].