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Affective Decision Making and the Ellsberg Paradox

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Author Info
Anat Bracha (Eitan Berglas School of Economics, Tel Aviv University)
Donald J. Brown () (Dept. of 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.

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File URL: http://cowles.econ.yale.edu/P/cd/d16b/d1667-r.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1667R.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 19 pages
Date of creation: Jun 2008
Date of revision: Aug 2008
Handle: RePEc:cwl:cwldpp:1667r

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Related research
Keywords: Affective choice; Endogenous risk perception; Insurance; Ellsberg paradox; Variational preferences; Ambiguity-seeking;

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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

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    Other versions:
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    Other versions:
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