Publication Date: June 2008
Revision Date: August 2008
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.
Aﬀective choice, Endogenous risk perception, Insurance, Ellsberg paradox, Variational preferences, Ambiguity-seeking
JEL Classification Codes: D01, D81, G22