The Deciding Factor

  • By David Levin
  • Posted 03.01.10
  • NOVA

Jennifer Lerner, a social psychologist at Harvard University, studies how emotions affect our financial decisions. In this podcast, hear about a new study she and her team are conducting that has revealed, among other things, how anger and sadness have very different effects on our economic choices.


A new study at Harvard is exploring how emotions affect our decisions, whether we like it or not.


The Deciding Factor

Posted March 1, 2010

DAVID LEVIN: You're listening to a NOVA podcast. I'm David Levin.

For more than 100 years, academic economists have treated the market almost like a force of nature—a vast invisible system that operates independently from human emotions. But on a day-to-day basis, emotion plays a big role in the choices we make. Especially the ways we spend our money. If you've ever bought anything on impulse or splurged when you're feeling down, you've experienced that firsthand.

JENNIFER LERNER: We're influenced by what happened this morning over breakfast. We're influenced by the e-mail message we just got that has absolutely nothing to do with the decision at hand. We're influenced by our chronic emotional tendencies. Do we tend to be an anxious person, et cetera, et cetera.

DAVID LEVIN: Jennifer Lerner is a social psychologist at Harvard University. She studies the ways that emotions can affect the economic decisions we make—from how much we'd spend on a water bottle, to how we might invest millions. She thinks that if emotion can alter people's choices on a small scale, it can also affect the way those choices help steer the global economy.

JENNIFER LERNER:So, traditional economic theory has assumed that people make decisions in a so-called rational way, and therefore, they will calculate costs and benefits, and focus only on decision-relevant criteria. That's not how people make decisions at all.

When we are experiencing emotions—imagine it's like a weather system: it affects everything. And those are the kinds of things that fly in the face of standard economic predictions.

DAVID LEVIN: Lerner is looking at the ways that specific emotions alter our economic choices.

In her experiments, she puts participants in a state of either low-level anger or sadness by showing them clips of tearjerker movies or violent thrillers. Then she has them go through a series of tasks where they can win or lose real money. What she's found is that anger and sadness have very different effects on people's choices.

JENNIFER LERNER: So what we've been discovering about sadness is that sadness has this effect on making people pay more to buy things, and making them impatient and willing to forgo money they could get in the future in order to get something smaller right now. Not only do they want to get more stuff, they want it more immediately.

DAVID LEVIN: Lerner says that anger has an equally drastic affect on decision making. In this case, though, it causes people to take more risks. Lerner measures that by having participants pump up virtual balloons on a computer screen—the more they pump, the more money they earn. But if the balloon pops, they lose money.

JENNIFER LERNER: So the question for each trial is, do you want to keep going and collecting more money and taking a risk that it might burst, or do you want to be safe and just collect a sure amount.

DAVID LEVIN: Lerner says that people who are angry consistently tend to pump the balloon more than others. That means they run a larger risk of it popping, but gain bigger rewards. And sure enough, Lerner says angry participants earn more money than their calmer counterparts.

JENNIFER LERNER: When you're angry, you tend to perceive things as more certain, and more under individual control. All of that translates into "you are more willing to take more risks". And in this particular task, being risk-taking is the right strategy for earning the most amount of money. So interestingly, the anger that people feel from having watched that video clip is having the effect of having them pump more, and then they earn more money.

DAVID LEVIN: The amount of money that Lerner's participants deal with in her experiments is small—in the range of tens or hundreds of dollars. It's not exactly breaking the bank. But in the real world, she says, they could just as well be dealing with millions of dollars, making huge investment decisions. She says the same rules apply.

JENNIFER LERNER: One thing to keep in mind is that the emotion that we induce when we're in the laboratory here is a very low level. And so if you assume that these effects scale up into the real world, and we have some evidence to suggest that they do, then you could have someone absolutely taking major risks repeatedly and a much bigger effect.

DAVID LEVIN: Lerner hopes to discover the underlying patterns of emotion—which mental states can make people take risks, or avoid risk altogether. Her theories are still controversial in the economics world, but she feels that she can give decision makers and investors a new tool, making them aware of their possible biases.

JENNIFER LERNER: If someone is, for example, in a heated situation where they are investing, investing, investing, we want them to know what the effect of the emotion is on them, so there can be more regulatory control. Right now, most investors, for example, have really no idea how sadness might impact them vs. anger vs. fear. And so it's important to realize that most high-stakes decisions do involve emotion, and that the emotions will absolutely be impacting how much money they win or lose.



Produced by
David Levin
Interview by
Malcolm Clark


(Jennifer Lerner)
Courtesy Jennifer Lerner/Harvard University

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