Affective Decision Making and the Ellsberg Paradox

Anat Bracha and Donald J. Brown ()
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Donald J. Brown: Dept. of Economics, Yale University, https://economics.yale.edu/people/emeritus/donald-j-brown

No 1667R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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 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.

Keywords: Affective choice; Endogenous risk perception; Insurance; Ellsberg paradox; Variational preferences; Ambiguity-seeking (search for similar items in EconPapers)
JEL-codes: D01 D81 G22 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2008-06, Revised 2008-08
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Related works:
Working Paper: Affective Decision Making and the Ellsberg Paradox (2008)
Working Paper: Affective Decision Making and the Ellsberg Paradox (2008)
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