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Affective Decision Making: A Behavioral Theory of Choice

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    Abstract

    Affective decision-making is a strategic model of choice under risk and uncertainty where we posit two cognitive processes — the "rational" and the "emotional" process. Observed choice is the result of equilibirum in this intrapersonal game. As an example, we present applications of affective decision-making in insurance markets, where the risk perceptions of consumers are endogenous. We then derive the axiomatic foundation of affective decision making, and show that, although beliefs are endogenous, not every pattern of behavior is possible under affective decision making.

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    File URL: http://cowles.econ.yale.edu/P/cd/d16a/d1633-r.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1633R.

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    Length: 22 pages
    Date of creation: Nov 2007
    Date of revision: Apr 2009
    Publication status: Published in Games and Economic Behavior (2012) 75: 67-80
    Handle: RePEc:cwl:cwldpp:1633r

    Note: CFP 1356
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    Related research

    Keywords: Affective choice; Endogenous risk perception; Insurance; Variational preferences;

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    Cited by:
    1. Imas, Alex, 2014. "Working for the “warm glow”: On the benefits and limits of prosocial incentives," Journal of Public Economics, Elsevier, vol. 114(C), pages 14-18.
    2. Junichiro Ishida, 2010. "Vision and Flexibility in a Model of Cognitive Dissonance," ISER Discussion Paper 0771, Institute of Social and Economic Research, Osaka University.

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