Title

Affective Decision Making: A Behavioral Theory of Choice

Document Type

Discussion Paper

Publication Date

11-1-2007

CFDP Number

1633R

CFDP Revision Date

2009-04-01

CFDP Pages

22

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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