Affective Decision Making And The Ellsberg Paradox
Source: Yale University
Affective decision-making is a strategic model of choice under risk and uncertainty where the authors posit two cognitive processes - the "Rational" and the "Emotional" process. Observed choice is the result of equilibrium in this intrapersonal game. As an example, they present applications of affective decision-making in insurance markets, where the risk perceptions of consumers are endogenous. They 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.