Aggregation of Heterogeneous Beliefs Under the Non-Additive Measure and its Application to Options Pricing

Ellsberg paradox and Allais paradox indicate that not all the information measures are additive and can be separated from preferences. Behavioral finance points out that beliefs of people are heterogeneous. In this paper, information therefore is described through non-additive measures, and aggregated with Choquet expectation in asset pricing. Considering the heterogeneity of people, we introduce a random parameter A to represent the diversity of people´s preferences and information processing methods. We then aggregate these heterogeneous beliefs by ordinary additive integral. In this way a new pricing method for European options is proposed. Simulation further proves that this method has advantages over traditional Black- Scholes method in interpreting some puzzles. This paper finally lays the foundation for empirical research that applies Bayesian updating from real market data.