‘Tis the season to be jolly, spend loads of money, and let’s face it, probably make some bad decisions too. Christmas is filled with nostalgia; we remember the feelings of excitement and joy from our own childhood and want to recreate those memories, either for ourselves or for our own children. More often than not at this time of year, our decisions are driven by emotions rather than any kind of rational cost-benefit analysis.
Behavioural economists call this the “affect heuristic”, a shortcut or rule of thumb that people tend to use when making decisions. Relying on feelings can speed up the decision-making process – and faced with that long to-do list before the holidays who wouldn’t want to speed things up a bit – but it can also lead to irrational choices and outcomes not in our own best interests.
Many choices are made under uncertainty, meaning we can’t be entirely sure what the outcome will be when we make a particular choice.
For example, suppose parents need to decide whether they let their child go on a school ski trip. Rationally, they should make their decision by weighing up the costs of the trip versus the benefits, but there are elements of uncertainty to both. If a child hasn’t skied before, they might not enjoy it, and any child risks getting injured skiing. If parents rely on the affect heuristic to evaluate the likelihood of these adverse outcomes, they will make biased decisions.
RM Block
An experienced skier who has never been injured skiing will have good feelings about it and evaluate the risks as low. Conversely, someone who previously broke their leg skiing might have bad feelings about it, and consequently evaluate the risks to be high. In both cases the risk evaluation is biased, under- and over-estimating the associated risks in comparison to an objective calculation.
Another way feelings can influence our decisions is through our expected emotional responses to different potential outcomes. We often make what are called “affective forecasts” - predictions of how we anticipate we will feel in future situations.
If someone is thinking about moving jobs, for example, what they should do is weigh up the advantages and disadvantages of the process. What they might do instead, however, is make affective forecasts. If they think they will be nervous in interviews and upset leaving their current position, then they might decide to stay where they are. In contrast, if they think they will feel strong and enthusiastic about the process, they will likely decide to give it a go.
Research shows that affective forecasts influence our behaviour in many different domains, ranging from relationships to sport and climate action. Interestingly, though, we tend to be pretty bad at predicting our own future emotions. We overestimate, resulting in forecast errors for both positive and negative emotions, but they are typically larger for negative emotional responses.
One explanation for why this happens is impact bias; we anticipate stronger, longer-lasting emotional responses than typically transpires. If I expect to feel nervous in a future scenario it’s likely that I will feel that way, but less so and for a shorter time than I forecast.
An additional reason that we overestimate our future negative emotions is because of “immune neglect”, whereby we underestimate our own ability to deal with future challenges and negative outcomes. We forget that when an adverse outcome occurs, our coping mechanisms tend to kick in, so we don’t feel as bad about it as we thought we would beforehand.
For example, one study asked before a race how track athletes expected they would feel if they failed to achieve their race goal. Compared to their true emotional responses to failure after the race, their actual negative emotions were lower than anticipated. Surprisingly though, the impact bias was greater for more experienced athletes, suggesting that experience doesn’t necessarily improve our forecasts; instead, repeated exposure to negative outcomes may in fact increase our errors. Rather than realising it’s never as bad as we expect it to be, we dread it happening again, overestimating the potential negative emotions to an even larger extent.
When it comes to positive emotional responses, because of another bias known as focalism, we also overestimate our future feelings. Imagine Ireland beat the Czech Republic in the play-off next year, win again five days later, and qualify for the World Cup. In anticipating how you would feel in this situation, you probably focus on the victory, thinking about how happy, excited and enthusiastic you would be.
By focusing on the event itself, you neglect to think about everything else that might be going on at the same time. Next March you might be stressed at work, arguing with your partner, or your kids might be complaining about you watching the match. So, although the anticipated positive emotions will be there, other factors might dampen their intensity or shorten their duration.
There are many reasons why we shouldn’t rely on our emotions to make decisions, at least not the important ones. Our choices will be biased, particularly if we’re anticipating how we will feel in the future. We can’t switch off our emotions, but we can correct for these biases to make better choices.
So, if you are tempted to overspend or borrow money to give your family the perfect Christmas, it almost surely won’t make you feel as good as you expect. But happily, if you were dreading the office Christmas party and thought about skipping it this year, it won’t have been as bad as you anticipated either.
Emma Howard is a lecturer in economics at Technological University Dublin. David McWilliams returns next week
