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Affective Decision-Making: A Theory Of Optimism-Bias

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Executive Summary

Optimism-bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, the authors propose an alternative model of risky choice, affective decision-making, where decision weights - which they label affective or perceived risk -are indigenized. Affective Decision Making (ADM) is a strategic model of choice under risk, where they posit two cognitive processes: the "Rational" and the "Emotional" processes. The two processes interact in a simultaneous-move intrapersonal potential game, and observed choice is the result of a pure strategy Nash equilibrium in this potential game.

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