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The Effect of Affect on Economic and Strategic Decision Making

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  • Benjamin E. Hermalin and Alice M. Isen.

Abstract

The standard economic model of decision making assumes a decision maker makes her choices to maximize her utility or happiness. Her current emotional state is not explicitly considered. Yet there is a large psychological literature that shows that current emotional state, in particular positive affect, has a significant effect on decision making. This paper offers a way to incorporate this insight from psychology into economic modeling. Moreover, this paper shows that this simple insight can parsimoniously explain a wide variety of behaviors.

Suggested Citation

  • Benjamin E. Hermalin and Alice M. Isen., 1999. "The Effect of Affect on Economic and Strategic Decision Making," Economics Working Papers E99-270, University of California at Berkeley.
    • Handle: RePEc:ucb:calbwp:e99-270
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    References listed on IDEAS

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    1. Paul M. Romer, 2000. "Thinking and Feeling," American Economic Review, American Economic Association, vol. 90(2), pages 439-443, May.
    2. W. Bentley MacLeod, 1996. "Decision, Contract, and Emotion: Some Economics for a Complex and Confusing World," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 788-810, November.
    3. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
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    5. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
    6. Kahn, Barbara E & Isen, Alice M, 1993. "The Influence of Positive Affect on Variety Seeking among Safe, Enjoyable Products," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 20(2), pages 257-270, September.
    7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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    More about this item

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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