The Effect of Affect on Economic and Strategic Decision Making

Abstract

The standard economic model of decision making assumes a decision maker’s current emotional state has no impact on his or her decisions. Yet there is a large psychological literature that shows that current emotional state, in particular positive affect, has a significant effect on decision making, problem solving, and behavior. This paper offers a way to incorporate this insight from psychology into economic modelling. Moreover, this paper shows that this simple insight can parsimoniously explain a wide variety of behaviors.