COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1667R Affective Decision Making and the Ellsberg Paradox Anat Bracha and Donald J. Brown Revised: 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. |
