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Working Paper
Affective decision making: a theory of optimism bias
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, we propose an alternative model of risky choice, affective decision making, where decision weights?which we label affective or perceived risk?are endogenized. Affective decision making (ADM) is a strategic model of choice under risk where we posit two cognitive processes?the "rational" and the "emotional" process. The two processes ...