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Emotional Temperature, Probabilistic Choice and the Optimal Power of Incentives *
Author(s) -
Basov Suren
Publication year - 2013
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12033
Subject(s) - rationality , incentive , intuition , probabilistic logic , decision maker , microeconomics , moral hazard , economics , social psychology , mechanism (biology) , affect (linguistics) , rational agent , psychology , expected utility hypothesis , positive economics , cognitive psychology , mathematical economics , computer science , epistemology , management science , artificial intelligence , cognitive science , neoclassical economics , philosophy , communication
From the time of Plato it has been assumed that emotions cloud rational thinking. Fully rational individuals were supposed to be completely free of emotions. Modern psychological research challenged this paradigm. One of the insights of this research is that though emotions indeed interfere with the ability to evaluate the objective consequences of choices, they also allow the decision maker to feel the difference in utility arising from those choices. In this article, I formalise this intuition by introducing the concept of emotional temperature. I show that there exists a positive optimal emotional temperature, which leads to an irreducible probability of suboptimal choice. I apply the model to characterise the optimal contracts under moral hazard, assuming that the emotional temperature of the decision maker increases when the contract provides more powerful incentives. A more general point the article makes is that a mechanism designer needs to be aware that the mechanism will not only affect incentives but also the degree of rationality of the agents.