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Affective decision making: A theory of optimism bias

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  • Bracha, Anat
  • Brown, Donald J.

Abstract

Optimism bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk and uncertainty, such as expected utility theory, subjective expected utility, and prospect theory. We therefore propose an alternative model of risky and uncertain choice where decision weights—affective or perceived risk—are endogenous.

Suggested Citation

  • Bracha, Anat & Brown, Donald J., 2012. "Affective decision making: A theory of optimism bias," Games and Economic Behavior, Elsevier, vol. 75(1), pages 67-80.
    • Handle: RePEc:eee:gamebe:v:75:y:2012:i:1:p:67-80
    DOI: 10.1016/j.geb.2011.11.004
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    More about this item

    Keywords

    Affective expected utility; Optimism bias; Demand for insurance;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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