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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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  • Anat Bracha & Donald J. Brown, 2007. "Affective Decision Making: A Behavioral Theory of Choice," Cowles Foundation Discussion Papers 1633R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2009.
  • Handle: RePEc:cwl:cwldpp:1633r Note: CFP 1356
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    Cited by:

    1. Dalton, Patricio S. & Ghosal, Sayantan, 2013. "Characterizing Behavioral Decisions with Choice Datas," SIRE Discussion Papers 2013-86, Scottish Institute for Research in Economics (SIRE).
    2. Dalton, Patricio & Ghosal, Sayantan, 2008. "Behavioural Decisions and Welfare," The Warwick Economics Research Paper Series (TWERPS) 834, University of Warwick, Department of Economics.
    3. Patricio S. Dalton & Sayantan Ghosal, 2011. "Behavioral Decisions and Policy," CESifo Economic Studies, CESifo, vol. 57(4), pages 560-580, December.
    4. 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.
    5. Anat Bracha & Donald J. Brown, 2008. "Affective Decision Making and the Ellsberg Paradox," Cowles Foundation Discussion Papers 1667, Cowles Foundation for Research in Economics, Yale University.
    6. Dalton, P.S. & Ghosal, S., 2010. "Behavioral Decisions and Welfare (Replaces CentER DP 2010-22)," Discussion Paper 2010-143, Tilburg University, Center for Economic Research.
    7. Deb, Rahul, 2008. "Interdependent Preferences, Potential Games and Household Consumption," MPRA Paper 6818, University Library of Munich, Germany.
    8. Junichiro Ishida, 2010. "Vision and Flexibility in a Model of Cognitive Dissonance," ISER Discussion Paper 0771, Institute of Social and Economic Research, Osaka University.

    More about this item

    Keywords

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

    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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