It’s (almost) all about emotions

(featured image credit: David Pacey CC BY)

Economics sometimes has a reputation of being a cold science, in which humanity has no part to play. But in many of our economic decisions, emotions are the prime influence

In business, economic decisions appear to be devoid of emotions. The upsides and downsides of decisions are almost always exclusively expressed in money. Whether it is building a new plant, expanding a store, training staff or even hiring, firing and promoting – often the overarching aim is to manage scarce resources and maximize long-term return on investment. That this happens within legal and ethical boundaries does not detract from this central principle.

At an individual, personal level, it seems different (we don’t normally consciously think in these terms), but it is more similar than it seems.

The quid pro quo

When we make a purchase, we sacrifice money, and we expect something in return that gives us more value than the amount paid. That value can be material, because it gives us a better return than cash in the bank (like a bond), because it reduces our exposure to risk (like insurance), or saves us time (like a washing machine). It can be partially immaterial (a boring and a cool T-shirt both cover our modesty, but the cool one has immaterial value) or entirely immaterial (think of experiential goods like a ticket to see the Rolling Stones on their latest final farewell tour).

Even when no money changes hands, we still make sacrifices for a reason, whether it’s giving up a quiet evening in because our offspring needs shuttling to and from various activities, or working up a sweat on a Saturday afternoon helping the neighbour removing a stubborn tree stump.

Feel the emotional connection! (image: Henry Burrows CC BY)

In all these situations, ultimately there is an emotional component at play. We clearly like doing favours to people family and friends. Financial security gives us peace of mind, and while we may not be deeply moved by the acquisition of a washing machine, we would probably feel quite emotional when it breaks down and we need to take our dirty smalls to the laundrette. The result of a trade, an exchange or a bargain – whether involving money or not – is measured primarily through our emotion. It feels nice to have a biscuit, a snazzy haircut, a pleasant walk, a gleaming car, and our salary paid into our bank account.

It is therefore not surprising that we find this prominent role for emotion also in interactions and transactions that are entirely in the realm of thoughts – a domain that is known as cognitive economics (I have written about it before). This subfield concentrates mostly on the value we put on information (and indeed thoughts themselves) we may (or may not) wish to acquire. That value can be positive, which means we are prepared to make a sacrifice (in money or otherwise) to obtain information; it can also be negative, when we prefer not to know something, and are willing to pay in some way to remain ignorant.

Someone in a far-flung country, with difficult communication channels back home, might be willing to pay good money to find out what the final score was in an important soccer game the team they support played earlier today. But someone who is at home and has missed the game because of annoying visitors may well be prepared to make a sacrifice not to be told the outcome before they’ve been able to watch the recording.

But cognitive economics is not just about information we don’t have and others may want to tell us. It can also be about information we have, and might share with others. Two anecdotes last week made me realize how remarkable this phenomenon is, and to what extent it is also driven by emotion.

The first one involved some knickknacks my youngest daughter wanted to get rid of. She has just moved house and has grasped the opportunity to tidy her possessions up a little. Ready to sell the surplus items on eBay or give them to charity, she first wanted to whether her mother had any interest in any of them.

The value of speaking

My inner neoclassical economist immediately concluded that, unless these objects really had no appeal to my wife, the right answer would be yes, we’ll have them. We would be materially no worse off, provided the cost of storing them, or of later getting rid of them if we didn’t want them after all, was small enough or negligible. But then it occurred to me, imagine we accepted one of those items and shortly afterwards, we’d bin it. Should we tell my daughter that we did, or not? I could feel conflicting emotions bubbling up. If we kept schtum, we were technically not lying, but also not quite being totally truthful. If we did say to her, “thanks for that bibelot, but we decided to throw it out after all”, she might be offended, and wish she had given it to a local charity shop or even sold it on.

Now, you could argue that we are really just acting out of a concern to spare our daughter upset. But the point is that we would care: it is our emotion that would be a big influence on our choice.

The second anecdote comes from the BBC radio soap The Archers. One of the characters had been buying a load of lottery scratch cards. However, he has been misinterpreting the cloverleaf symbol as a flower, and has thrown away a winning card showing four clovers. I imagined that I was the person who would realize this – would I tell him? What emotions would I feel – schadenfreude, sorrow, condescension, sympathy? How would I decide what to do?

As it turns out, some righteous soul has found the winning scratch card, and rather than pocket the proceeds himself, is adamant it will either go back to the original owner (if they can find out who it is), or be donated to some community event. Now imagine you were that finder, and as you could not determine whose scratch card it was, you gave the money – a substantial amount – away. Shortly after, you do find out the identity of the original owner. Would you tell him? What emotions would you feel, and how would they determine what you decide to do?

To gossip or not to gossip – an economic decision? (image: Ekaterina CC BY)

It’s not always negative emotions fuelling reluctance, though. We also sometimes feel an urge to share information with others. Who has not felt the joyful excitement at the prospect of revealing news that the other person does not know yet, relating something spectacular they recently experienced or maybe even, if they are so inclined, telling a piece of gossip?

Part of the emotion we sense when we consider whether or not we will share some piece of information with someone else is surely to do with how we think they will react, and indeed with the emotions we expect them to experience. That may hold us back, or that may encourage us.

But there is definitely also utility, positive or negative, in simply expressing that information, irrespective of the audience. There are things about ourselves that we are loath to reveal to anyone, even a therapist or a priest in the confessional where their emotions don’t matter. And we may be bursting of joy about something – passing a key exam, getting a dream job – to such an extent that we just have to tell someone, anyone. Arguably we can even get some positive value when there is nobody listening – like singing in the shower, or cursing when we drop a bottle of milk (both of which I can testify about).

Emotions play an important part in almost all of our economic decisions. Could the joy, or the dread, we feel about saying something be the purest demonstration of that role?

About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics, Psychology and tagged . Bookmark the permalink.

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