CFDP 1633R

Affective Decision Making: A Behavioral Theory of Choice

Author(s): 

Publication Date: November 2007

Revision Date: April 2009

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.

Keywords: 

Affective choice, Endogenous risk perception, Insurance, Variational preferences

JEL Classification Codes: D01, D81, G22