Although a good sense of self-esteem and self-love is healthy, some people. It exists in all domains and facets of life, causing us to think we’re more hard-working, funnier, more attractive, better drivers, more skilled, and more honest than the people around us. In finance, this can result in underestimating the risks. We prove that ADM potential games are refutable by axiomatizing the ADM potential maximizers. In psychology, this is known by a more precise name: the self-enhancement bias. Optimism bias occurs when someone overestimates the likelihood of positive outcomes and underestimates the likelihood of negative outcomes. We show that regular ADM potential games have an odd number of locally unique pure strategy Nash equilibria, and demonstrate this finding for ADM in insurance markets. The two processes interact in a simultaneous-move intrapersonal potential game, and observed choice is the result of a pure Nash equilibrium strategy in this game. 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.Īffective decision making (ADM) is a strategic model of choice under risk where we posit two cognitive processes-the "rational" and the "emotional" process. Therefore, this study aimed to investigate the effect of emotional intelligence on decision-making. These cognitive biases or judgment errors have a significant effect on investment decisions. Normalcy bias is the tendency to underestimate the likelihood or impact of a potential disaster or threat, based on a belief that things will always. Investors make decisions based on market knowledge and ignore cognitive biases. Normalcy bias and optimism bias are both cognitive biases that can affect how people perceive and respond to potential risks or threats, but they differ in their underlying mechanisms and effects. 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. The commodity market plays a vital role in boosting the economy.
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