Emotions
Strong emotions can change what we buy, sell, or consider risky. We may also misjudge how intensely we will feel about a future event and how long that feeling will last.
THE IDEA
25. EMOTIONS
The heart has its reasons of which reason itself knows nothing.
- Blaise Pascal
"I got married in the heat of passion. Sorry dad," John's daughter said.
Francis Bacon said: "The guilt of Senses is of two sorts, either it destitutes us, or else deceives us." Strong emotions can shape a decision before we have thought it through. Under their influence, we sometimes make hasty judgments and choices we would otherwise avoid. For example, we buy things we can't afford, we have unprotected sex, we overeat, and use drugs. Studies also show that when we are in a state of more rational calm, we underestimate how we will feel and act when we experience intense emotions.
"I had a really bad day today," said Mary, "So I'm going shopping now."
One study tried to find out how disgust and sadness influenced economic decisions. All participants in the study watched a movie immediately before conducting financial transactions. Some watched a sad movie. Others a disgusting movie and a third group an emotionally neutral movie. Participants insisted that their feelings didn't affect what they were willing to pay for something or what price they were willing to accept. The study showed otherwise. Disgust reduced their selling and buying prices. Sadness cut their selling prices but raised their buying prices.
The endowment effect is the tendency to value something more when we own it. In the study described here, sadness reversed the usual gap: participants were willing to accept less to sell an item than they were willing to pay to buy it.
This means that when we feel sad, which often reflects helplessness and loss, we may want to change our circumstances so we feel better. This may cause us to overpay for something or buy things we don't need. Mary’s shopping trip illustrates that impulse. When we feel disgust we may be reluctant to buy anything new unless we find it is a real bargain. When we feel sadness or disgust we may want to get rid of things we have and sell them for less than what they are worth.
"It doesn't matter how large the problem is. It doesn't feel good."
Our perception of risk has an emotional component. We automatically judge how good or bad a stimulus is based on how we feel about it. When something produces strong emotions, we overweigh its consequences and underweigh its chance of happening. We associate gains with great feelings. For example, studies show that our feelings toward winning the lottery are the same whether the chance of winning is one in 10 million or one in 10,000.
John is buying a new sports car. He is all excited. But how will he feel one year from now?
We expect that if good or bad things happen to us in the future, they will make us feel better or worse much longer and more intensively than they actually turn out to be. So John's new car will probably be less exciting than John expects. The excitement may also fade sooner than he expects. We often adapt to changed circumstances, although adaptation varies and some events have lasting effects on life satisfaction. Other events and people will also influence how John feels. Furthermore, the comparisons we make when we think about our future feelings are often not the comparisons we make when we experience the event.
What about if we instead use our past good experiences to decide what we want? Can we trust our memories to guide us? Memories can be deceptive. We also underestimate how our tastes and preferences will change. The Roman poet Titus Lucretius Carus said: "As long as we do not have it, the object of our desire seems greater than anything else; as soon as we enjoy it, we long for something different with an equal craving."
What could we do instead? When we make big decisions, we could compare our expected feelings with those of people who have similar experiences today. In that sense, we are not as unique as we think we are.
Keep in mind
• Understand your emotions and their influence on your behavior. Ask: Is there a rational reason behind my action?
• Remember the proverb: "A wise man controls his temper. He knows that anger causes mistakes."
• When we have just gone through an emotional experience, we should hold off on important decisions.
• A cooling-off period gives us time to think a decision through.
When to use it
Before a large purchase, allow time to compare the price and your needs after the initial excitement fades.
In negotiations, be aware that your emotional state can affect your willingness to accept or offer prices, so aim to negotiate when calm.
When experiencing strong emotions like sadness or disgust, postpone decisions that involve buying or selling valuable possessions.
When considering a waiting-period policy, weigh the opportunity for reflection against the costs of delay.
FROM THEORY TO EVERYDAY LIFE
In practice
Mary's Shopping Spree
After a bad day, Mary goes shopping to feel better, illustrating how sadness can lead to impulsive purchases.
Disgust and Economic Decisions
In a study, participants who watched a disgusting movie later showed reduced buying and selling prices, while those who watched a sad movie had lower selling prices but higher buying prices, demonstrating that emotions unconsciously affect financial choices.
A MOMENT TO REFLECT
Put it to work.
Recall a decision you made while experiencing strong emotions. How might the outcome have been different if you had waited until you were calmer?
When you feel sad or upset, what strategies can you use to avoid making impulsive purchases or selling valuable items?
Think of a major purchase you plan to make. How do you expect to feel a year after the purchase, and why might your prediction be inaccurate?
CONTINUE THE CONVERSATION
Source texts
- Seeking Wisdom From Darwin to Munger (Peter Bevelin)