COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1633

Affective Decision Making: A Behavioral Theory of Choice

Anat Bracha and Donald J. Brown

November 2007

Affective decision-making (ADM) is a refutable and predictive theory of individual choice under risk and uncertainty. It generalizes expected utility theory by positing the existence of two cognitive processes -- the "rational" and the "emotional" process. Observed choice is the result of their simultaneous interaction. We present a model of affective choice in insurance markets, where risk perceptions are endogenous.

Keywords: Affective choice, Endogenous risk perception, Expected utility theory, Insurance

JEL Classification: D01, D81, G22