If you are depressed or even a little bit sad, keep your wallet at home. That’s the advice from experiments conducted by social psychologists at Harvard, Stanford and other universities. Behavioral research studies show that “feeling sad” may cause people to overpay for commodities at the rate of 30-300% more than they otherwise would. This research of course, flies in the face of New Classical economists claiming most individual consumers evaluate and make rational purchasing decisions. When it comes to spending, are you rational, or does emotion play a larger role?
A PBS special, “Mind over Money” mentions two schools of thought in economic decision-making; rationalists vs. behavioralists. The rationalists assume that consumers are completely rational, evaluating all available alternatives in a world of perfect information. Behavioralists, on the other hand, believe that emotion, excitement, and mood play a larger role in economic decision-making than previously considered.
A research report titled “Misery is Not Miserly” sheds some light on which line of thinking currently has the upper hand.
In a study, researchers hypothesized that people who “feel sad” and are more “self-focused” tend to spend more for commodities. To prove this hypothesis, psychologists set up two groups in different rooms. The test group was shown a sad video clip (the death of a boy’s mentor from “The Champ”), asked to write an essay, and then instructed to buy sporty water bottle. The baseline group was given the same task, but instead of watching the emotional video clip, members viewed a National Geographic segment on the Great Barrier Reef.
Though rationalists would say that there shouldn’t be any emotion carry-over effects from watching the scene from “The Champ,” the group exposed to the tragic video scene tended to pay up to four times more for the water bottle than the control group. This, in spite of many of the control group participants claiming the video did not affect their decision-making!
The researchers surmise that “sad and self-focused individuals spend more on commodities than other people do because they seek self-enhancement.” This in turn allows them to “increase the valuation of possessions that one might acquire.” In other words, people feeling sad or even depressed may find themselves overpaying for items in an effort to improve their state of mind.
Perhaps at this point you may be thinking that an experiment with water bottles has little relevance in your daily decision-making. Harvard social psychologist Jennifer Lerner would counsel you otherwise. She says, “(These) experiments have been done with high stakes money—a thousand dollars, etc.,—and what we find is that these results scale up, even when you use big money.”
Rational economists like John Cochrane from the Chicago School of Economics say emotions matter very little in economic decision-making. “The observation that people feel emotions means nothing,” he says. “If you’re going to just say markets went up because there was a wave of emotion, you’ve got nothing. That doesn’t tell us what circumstances are likely to make markets go up or down. That would not be a scientific theory.”
Counter that statement with Harvard’s Lerner, who claims emotions play a pretty significant role in economic decision-making, especially when experiments show sad and self-focused people spend more than they should.
The conclusions drawn from this debate matter very much, especially considering economic thought over the past 40 years has centered on rational decision-making. If rational decision-making isn’t the norm for consumers, it may be time to take a fresh look at the power of emotion in driving daily purchasing decisions.
Questions:
• The PBS Mind over Money special asks, “Does raw human emotion dictate your financial decisions, or are we rational calculators of our own self-interest?” What are your thoughts?
• Have you ever shopped when sad or depressed? Would you agree with the Harvard studies that “sad and self focused individuals spend more”?
Tags: behavioral economics, buying, consumer psychology, Emotion, experimentation, rational decision making
“Does raw human emotion dictate your financial decisions, or are we rational calculators of our own self-interest?”
Are you kidding!? Why is over $500B spent on advertising…does that have no effect? Why did the Old Spice commercials double sales? Why did the Domino’s commercials increase their stock by 50%? Why did ‘trust in someone like me’ triple and 80% of people seek stranger reviews before they buy? Why do people buy luxury? Why does ‘relationship’ matter in enterprise selling? Why would someone every buy a new car? Why do people buy diamonds? Why did Shopzilla report that people do not buy the lowest price from shopping comparison engines? Why did I hear that a retailer who invested in wood floors and decor see a substantially higher sales impact than the cost of the decoration? Why does spending slow down based on fears of the market? Have you heard of the saying “people buy on emotion and justify with fact”? How many more questions must one ask to prove that humans are emotional and that drives decision making?
Sam, thank you for commenting! Lots of great rhetorical questions! Rational economists would tell you that while people have emotions, “financial self-interest” dominates over emotions. Indeed, they posit that we are in fact human calculators, always calculating the impact of every economic decision we make. This of course, leaves little room for the impulse and possibly irrational buying decisions that are commonplace in today’s marketplace.
Whether consumers are rational or irrational actually matters quite a bit from a macro-economic perspective, especially because many government policies today and in the past have been driven via assumptions in favor of rational decision making. For example, if we’re not rational decision makers and the emotional element weighs more in consumer behavior, then there are implications and decisions to be made in ensuring a more robust financial infrastructure, and preventing another market meltdown. The debate is far from over and in fact discussions are ongoing -even in today’s financial press!
Interesting! I don’t think, however, a study of 33 people (even twice) makes for a solid scientific observation. I do think that buying decisions, especially in the clothing business, are very much controlled by emotions. Those emotions can be happy or sad. If you are having a first date it is generally a happy occasion (at least at first) and you want to make a good impression. If you are attending a funeral, you may look for clothing that reflects your grief. How does that affect how much you will pay, I don’t know. All purchases and actions can be explained by Maslow’s Hierarchy of Needs.
I do believe that and high state of emotions might affect your reasoning powers, but I am sure this silly study of showing a 25 year old movie clip and some underwater footage to 33 people should not be used for any reasonable retail strategy.
Harry, thanks for your smart observations. While I highlighted this particular study as a proof point for irrational decision making, in fact there are many studies and texts on this emerging field of behavioral economics. I’ll contend that behavioral economics isn’t mainstream and that the rational economics is still the most pervasive school of thought. However individuals such as Richard Thaler, Andrew Lo, Michael Mauboussin, Dan Ariely and others offer an illuminating counter argument.
Here’s a sampler: http://www.businessweek.com/magazine/content/06_08/b3972033.htm
• The PBS Mind over Money special asks, “Does raw human emotion dictate your financial decisions, or are we rational calculators of our own self-interest?” What are your thoughts?
Speaking for myself, I would say that my financial decisions are a mix of rational and emotional factors. Because of imperfect information, it is really hard to know exactly what the most rational decision would be.
I’d like to think that most of my decisions are rational but anyone who has made an impulse buy or has had buyer’s remorse knows that emotions can take the wheel at times. What was I thinking when I bought this thing? Krykie.
Marketers and behavioral economists agree that emotion plays a role in buying decisions. The rationalists probably throw up their hands and just assume away emotions. How can you build a model around something so ethereal?
• Have you ever shopped when sad or depressed? Would you agree with the Harvard studies that “sad and self focused individuals spend more”?
For me feeling good goes along with enthusiasm and energy, whereas feeling depressed often saps my energy. If I am feeling down, I am more likely to spend less time comparing prices and evaluating options. If I am feeling down, I am more likely to make an impulsive decision: the heck with it, I will buy this one.
Neil, thank you for taking time to comment. You said, “The rationalists probably throw up their hands and just assume away emotions. How can you build a model around something so ethereal?” Indeed, if the world of consumer behavior is more emotional than rational, the beautiful mathematical models that portend to explain much of today’s consumer behavior fall apart. While some may believe this debate is entirely academic, it’s important to remember that much of today’s economic and govt policy is based on theories of efficient markets operating in a world of perfect information. If this hypothesis falls out of favor, then there are staggering implications for policy makers—financial reform for starters…
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