Publication Date: November 2007
Revision Date: April 2009
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.
Aﬀective choice, Endogenous risk perception, Insurance, Variational preferences
JEL Classification Codes: D01, D81, G22