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 equilibirum 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 then d...

We investigate the “law of small numbers” using a data set on lotto gambling that allows us to measure players’ reactions to draws. While most players pick the same set of numbers week after week, we find that those who do change, react on average as predicted by the law of small numbers as formalized in recent behavioral theory. In particular, players tend to bet less on numbers that were draw...

Let X be a compact, or path-connected, metric space whose topological dimension is at least 2. We show that there does not exist a continuous choice function (i.e., single-valued choice correspondence) defined on the collection of all finite feasible sets in X. Not to be void of content, therefore, a revealed preference theory in the context of most infinite consumption spaces must either relin...

This paper investigates biases in the perceptions of probabilities using data from the 1989 and 1994 seasons at the Woodlands greyhound park in Kansas City, Kansas. Results reveal consistent evidence that the gambler’s fallacy exists. The results also reveal that gamblers overestimate the probability of a win by the favorite and the dog in the “lucky” seven position. However, the comparison als...

This paper compares Bayesian decision theory with robust decision theory where the decision maker optimizes with respect to the worst state realization. For a class of robust decision problems there exists a sequence of Bayesian decision problems whose solution converges towards the robust solution. It is shown that the limiting Bayesian problem displays infinite risk aversion and that decision...

We search for behavioral rules that attain minimax regret under geometric discounting in the context of repeated decision making in a stationary environment where payo¤s belong to a given bounded interval. Rules that attain minimax regret exist and are optimal for Bayesian decision making under the prior where learning can be argued to be most di¢cult. Minimax regret can be attained by randomiz...

We analyze a sequential decision model with one-sided commitment in which decision makers are allowed to choose the time of acting (exercising a risky investment option A) or waiting. We characterize information cascade under endogenous ordering and show that with endogenous ordering, if the number of decision makers is large and decision makers are patient enough, at any fixed time, nearly all...

Research into accounting risk-return relations largely relied on reference-based models of managerial choice. This focus ignores other explanations that may contribute to our understanding. Our study extends prior research by incorporating agency theory and implicit contracts theory into models based on the behavioral theory of the firm. We test our hypotheses in a large sample of US manufactur...

The number of Internet news media outlets has grown rapidly in recent years. This paper analyzes the effects of media proliferation on electoral outcomes and social welfare. We assume voters are information-seeking but choose outlets that are excessively partisan given the voters’ own ideological preferences, due to quasi-rationality. We find that if voters who think (correctly or not) that the...

In this paper we investigate whether macroeconomic uncertainty could distort banks’ allocation of loanable funds. To provide a road– map for our empirical investigation, we present a simple framework which demonstrates that lower uncertainty about the return from lending should lead to a more unequal distribution of lending across banks as managers take advantage of more precise knowledge of di...