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Affective Decision Making: A Behavioral Theory of Choice

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Abstract

Affective decision-making (ADM) is a refutable and predictive theory of individual choice under risk and uncertainty. It generalizes expected utility theory by positing the existence of two cognitive processes -- the "rational" and the "emotional" process. Observed choice is the result of their simultaneous interaction. We present a model of affective choice in insurance markets, where risk perceptions are endogenous.

Suggested Citation

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

    1. Patricio S. Dalton & Sayantan Ghosal, 2011. "Behavioral Decisions and Policy," CESifo Economic Studies, CESifo Group, vol. 57(4), pages 560-580, December.
    2. Dalton, Patricio S. & Ghosal, Sayantan, 2013. "Characterizing Behavioral Decisions with Choice Datas," SIRE Discussion Papers 2013-86, Scottish Institute for Research in Economics (SIRE).
    3. Dalton, Patricio & Ghosal, Sayantan, 2008. "Behavioural Decisions and Welfare," The Warwick Economics Research Paper Series (TWERPS) 834, University of Warwick, Department of Economics.
    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)," Other publications TiSEM 274e6102-4c86-4ca9-8d67-8, Tilburg University, School of Economics and Management.
    7. Dalton, Patricio & Ghosal, Sayantan, 2018. "Self-fulfilling mistakes : Characterization and welfare," Other publications TiSEM 4ea1a236-5307-4b4b-b268-e, Tilburg University, School of Economics and Management.
    8. Deb, Rahul, 2008. "Interdependent Preferences, Potential Games and Household Consumption," MPRA Paper 6818, University Library of Munich, Germany.
    9. Junichiro Ishida, 2010. "Vision and Flexibility in a Model of Cognitive Dissonance," ISER Discussion Paper 0771, Institute of Social and Economic Research, Osaka University.

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    More about this item

    Keywords

    Affective choice; Endogenous risk perception; Expected utility theory; 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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