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The Effect of Affect and Economic and Strategic Decision Making

  • Hermalin, Benjamin E.
  • Isen, Alice M.

The standard economic model of decision making assumes a decision maker makes her choices to maximize her utility or happiness. Her current emotional state is not explicitly considered. Yet there is a large psychological literature that shows that current emotional state, in particular positive affect, has a significant effect on decision making. This paper offers a way to incorporate this insight from psychology into economic modeling. Moreover, this paper shows that this simple insight can parsimoniously explain a wide variety of behaviors.

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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt4fn1b57s.

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Date of creation: 01 Dec 1999
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Handle: RePEc:cdl:econwp:qt4fn1b57s
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  1. W. Bentley MacLeod, 1996. "Decision, Contract and Emotion: Some Economics for a Complex and Confusing World," Boston College Working Papers in Economics 336., Boston College Department of Economics.
  2. Benhabib, Jess & Day, Richard H, 1981. "Rational Choice and Erratic Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 459-71, July.
  3. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  4. Shira B. Lewin, 1996. "Economics and Psychology: Lessons for Our Own Day from the Early Twentieth Century," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1293-1323, September.
  5. Kaufman, Bruce E., 1999. "Emotional arousal as a source of bounded rationality," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 135-144, February.
  6. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  8. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  9. David Laibson, 2001. "A Cue-Theory Of Consumption," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 81-119, February.
  10. Romer, Paul M., 2000. "Thinking and Feeling," Research Papers 1618, Stanford University, Graduate School of Business.
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