Affective Decision Making and the Ellsberg Paradox
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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 equilibrium 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 derive the axiomatic foundation of aﬀective decision making, and show that aﬀective decision making is a model of ambiguity-seeking behavior consistent with the Ellsberg paradox.
Bracha, Anat and Brown, Donald J., "Affective Decision Making and the Ellsberg Paradox" (2008). Cowles Foundation Discussion Papers. 1975.