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The Effect of Affect on Economic and Strategic Decision Making

Author

Listed:
  • Benjamin E. Hermalin

    (University of California)

  • Alice M. Isen

    (Cornell University)

Abstract

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.

Suggested Citation

  • Benjamin E. Hermalin & Alice M. Isen, 2000. "The Effect of Affect on Economic and Strategic Decision Making," Econometric Society World Congress 2000 Contributed Papers 1136, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1136
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    References listed on IDEAS

    as
    1. Paul M. Romer, 2000. "Thinking and Feeling," American Economic Review, American Economic Association, vol. 90(2), pages 439-443, May.
    2. David Laibson, 2001. "A Cue-Theory of Consumption," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 81-119.
    3. W. Bentley MacLeod, 1996. "Decision, Contract, and Emotion: Some Economics for a Complex and Confusing World," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 788-810, November.
    4. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
    5. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
    6. 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.
    7. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    9. Jess Benhabib & Richard H. Day, 1981. "Rational Choice and Erratic Behaviour," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 459-471.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kirchsteiger, G. & Rigotti, L. & Rustichini, A., 2000. "Your Morals are Your Moods," Discussion Paper 2000-122, Tilburg University, Center for Economic Research.
    2. Stephan Meier & Alois Stutzer, 2008. "Is Volunteering Rewarding in Itself?," Economica, London School of Economics and Political Science, vol. 75(297), pages 39-59, February.
    3. Hakan Berument & Onur Ince & Eray Yucel, 2006. "Success in soccer and economic performance: Evidence from beŞİktaŞ-Turkey," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 53(2), pages 260-274, June.
    4. Stephan Meier & Alois Stutzer, 2004. "Is Volunteering Rewarding in Itself? Evidence from a Natural Experiment," CREMA Working Paper Series 2004-12, Center for Research in Economics, Management and the Arts (CREMA).
    5. James, Harvey S., Jr. & Chymis, Athanasios G., 2004. "Are Happy People Ethical People? Evidence From North America And Europe," Working Papers 26034, University of Missouri Columbia, Department of Agricultural Economics.
    6. Kirchsteiger, Georg & Rigotti, Luca & Rustichini, Aldo, 2006. "Your morals might be your moods," Journal of Economic Behavior & Organization, Elsevier, vol. 59(2), pages 155-172, February.
    7. Lucy F. Ackert & Jorge Martinez-Vazquez & Mark Rider, 2004. "Tax policy design in the presence of social preferences: some experimental evidence," FRB Atlanta Working Paper 2004-33, Federal Reserve Bank of Atlanta.
    8. Konstantinos Drakos, 2011. "Security Economics: A Guide For Data Availability And Needs," Defence and Peace Economics, Taylor & Francis Journals, vol. 22(2), pages 147-159.
    9. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2003. "Emotion and financial markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 33-41.
    10. Mohanty, Madhu S. & Ullah, Aman, 2012. "Direct and indirect effects of happiness on wage: A simultaneous equations approach," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(2), pages 143-152.
    11. De Figueiredo, John M. & De Figueiredo, Rui J. P. Jr., 2002. "Managerial Decision-Making in Non-Market Environments: A Survey Experiment," Working papers 4246-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    12. Jang, Woan-Yuh & Lee, Jie-Haun & Hu, Hsueh-Chin, 2016. "Halo, horn, or dark horse biases: Corporate reputation and the earnings announcement puzzle," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 272-289.
    13. repec:eee:riibaf:v:44:y:2018:i:c:p:273-284 is not listed on IDEAS
    14. Dragone, Davide & Viviani, Michele, 2007. "Cultura Organizzativa e Sostenibilita' della Governance Multistakeholder," AICCON Working Papers 40-2007, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
    15. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.

    More about this item

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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