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Affective Decision Making and the Ellsberg Paradox

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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 equilibrium 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 derive the axiomatic foundation of affective decision making, and show that affective decision making is a model of ambiguity-seeking behavior consistent with the Ellsberg paradox.

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    File URL: http://cowles.econ.yale.edu/P/cd/d16b/d1667-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 1667R.

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    Length: 19 pages
    Date of creation: Jun 2008
    Date of revision: Aug 2008
    Handle: RePEc:cwl:cwldpp:1667r

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    Related research

    Keywords: Affective choice; Endogenous risk perception; Insurance; Ellsberg paradox; Variational preferences; Ambiguity-seeking;

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