COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1633R Affective Decision Making: A Behavioral Theory of Choice Anat Bracha and Donald J. Brown November 2007 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. JEL Classifications: D01, D81, G22 Keywords: Affective choice, Endogenous risk perception, Insurance, Variational preferences |
