Topic 2: Role of Emotions

Question 1

Distinguish between emotions, moods and affect

Answer 1

Emotions: A COMPLEX STATE OF FEELING that results in physical and psychological changes that INFLUENCES THOUGHT AND BEHAVIOUR

Moods: emotional states, they are LOW-INTENSITY, diffuse and enduring affective states that have no salient cause and LITTLE COGNITIVE CONTENT (e.g. feeling good or feeling bad)

Affect: UNSPECIFIED FEELINGS, the super-ordinate umbrella of constructs involving emotion, mood and emotion-related traits - encapsulates both emotions and moods

–> these are definitions from psychology, in economics we use them interchangeably.

Question 2

Rational Choice Theory

Answer 2

Standard Utility Theory where the role of emotions should not have an impact, and rarely appeared in decision-making as individuals were assumed to be rational and profit maximising. The role of emotions in economic theory increased and so did the proportion of papers on emotions (exponentially increased)

Question 3

Lerner et al (2015)

Answer 3

Examine the 8 Major themes of scientific enquiry, which shoe the nature of emotion and decision-making:

1. Integral Emotions Influence Decision Making
2. Incidental Emotions Influence Decision-Making
3. Emotional Valence is one of dimensions that shape emotions’ influence on decision making
4. Emotions shape content of thought
5. Emotions shape depth of thought
6. Emotions shape decisions via goal activation
7. Emotions influence interpersonal decision-making
8. Unwanted Effects of emotions on decision making can be reduced under certain circumstances

Question 4

1. Integral Emotions

Answer 4

• Feelings integral to the decision I am making at the moment
• Person who feels anxious about the potential outcome of a risky choice may choose a safer option than a potentially more lucrative one
• Person who feels grateful to a school she attended may donate even though it limits their own spending.
• *Beneficial
• Can help in decision making e.g. evidence from emotionally impaired patients who had injuries to their brain integrating emotions - they couldn’t feel emotions and it was found they were not making optimal decisions.. emotions can allow you to mark things as good or bad
• Damasio - participants with vmPFC injuries select a riskier financial option over a safer one => suboptimal, they do not experience emotional signals (“somatic markers”)

**Bias
Emotions can also create bias (=deviation from decision-making)
e.g. one may feel more afraid to fly than driving a car, even though base rates for death by car accidents are much higher than flying => anticipation of fear

Question 5

2. Incidental Emotions

Answer 5

Feeling at the time of the decision not relevant for when deciding.
Incidental anger triggered in one situation automatically elicits a motive to blame individuals in their situations even though the targets of such anger have nothing to do with the source of anger
TYPICALLY OCCURS WITHOUT US REALISING

**Incidental emotions as bias
Incidental emotions carry over from one situation to the next, affecting decisions that should be unrelated to that emotion.
=> process known as the carry over of incidental emotions
=> most common model to explain the mechanism is called the valence-based model, dividing emotions into positive and negative
=> emotions of the same Valence would have similar effects e.g. happy and excited=> similar, optimistic
angry and sad => similar, pessimistic

incidental emotions - Johnson and Tversky 1983, Rick and Loewenstein 1987.

Question 6

Johnson and Tversky (1983)

Answer 6

Why is it important: First empirical demonstration of incidental mood on risk perception
Induced mood and looked at how that affected perceptions of risk

Design:
Participants were asked to read newspaper stories designed to induce positive or negative mood and then estimate fatalities=> Velten MIP

Results:
Participants who read +VE stories, estimates of fatalities were lower because => positive mood, more optimistic and those who read - stories were pessimistic
=> mood influenced all judgements

Other examples:
- Hirshleifer and Shumway (2003)
Saunders (2003)
=> *positive correlation between the amount of sunshine and stock returns. the performance of a stock market=> POSITIVE CORRELATION BETWEEN THE AMOUNT OF SUNSHINE AND GOOD WEATHER AND THE PERFORMANCE OF THE STOCK MARKET - BECAUSE WEATHER AFFECTS DECISION-MAKING VIA MOOD - SUNSHINE - GOOD MOOD - IF INVESTORS REALISE THIS, THEY CAN MITIGATE THE EFFECT OF MOOD ON DECISION-MAKING
- Edmans et al. (2007)
Stock market returns declined when a country’s soccer team was eliminated from the World Cup

-Yip and Cote (2013): individuals with high emotional intelligence can correctly identify which events caused their emotions and can screen out the impact of incidental emotion
=> the magnitude of the bias depends on your emotional intelligence
higher emotional intelligence, less likely to be biased (disentangle the effects of incidental anxiety from the actual decision arising at hand).

Question 7

3. Emotional Valence

Answer 7

Typically, valence-based approach assumes feeling sad and angry have similar effects - emotions with the same valence
But:
- Does not take into account the differences between emotions
e.g. anger and sadness are associated with different depth of processing, facial expressions, etc.

Question 8

The Appraisal-Tendency Framework (ATF)***

Answer 8

The ATF links the appraisal processes associated with specific emotions to different judgements and choice outcomes:

• the ATF predicts that opposite to the valence-based approach => emotions with the same valence can exert opposing influence on choices and judgements
• appraisal tendencies= goal-directed processes of emotions which affect judgements and decisions until the emotion-eliciting problem is resolved.
• if angry, increased certainty. if afraid, reduced certainty (=the degree to which future events seem predictable and comprehensible vs. unpredictable and incomprehensible
• similarly, if angry, high individual control vs. if afraid, low control

Question 9

4. Content of thought - Appraisal Tendency***

Answer 9

Why is ATF important?
It helps us understand behaviour and therefore predict behaviour
- differences in appraisal tendencies are particularly relevant to risk perception; fearful people (less likely to take risks) whereas angry people more likely

• the ATF refers to the goal-directed processes of emotions which affect judgements and decisions until the emotion-eliciting problem is resolved.
• appraisal tendencies directly contrast the valence-based approach, as emotions of the same valence may still have opposing influences on decision-making, e.g. anger and fear are both negative emotions but can have different impact on attitudes to risk via (un)certainty.

Question 10

5. Depth of Thought

Answer 10

Emotions influence the depth of information
If Emotions signal situations demanding more attention:
- Negative mood - more pessimistic - look more into detail , increase vigilant processing
- Positive mood - more optimistic, signal a safe environment and therefore less processing

Research - clear influences particularly from happiness and sadness

Question 11

Bodenhausen et al. (1994)

Answer 11

Depth of Thought =>
Compared the effects of sadness and anger=> both with negative valence.
- Relative to neutral or sad participants, angry participants, showed more reliance on heuristics - less processing => like when you are happy

Directly contrasts the valence-based approach which says negative valence will have similar effects

Question 12

6. Goal Activation***

Answer 12

Emotions serve an adaptive coordination role, triggering a set of responses that enable individuals to address encountered problems or opportunities quickly
=> emotions lead to action tendencies (e.g. sadness accompanies the action to change one’s current circumstances)

-Example 1:
studies contrasted the effects of incidental anxiety and sadness on gambling and job-selection scenarios
Results: sadness increased tendencies to favour high-risk, high-reward options, whereas anxiety increased tendencies to favour low-risk, low-reward options
=> this contrasts the valence approach, as similar valence but different outcomes

-Example 2:
Effect of disgust on the endowment effect
1. Endowment effect - when you own something you value it more WTP myopic misery: myopic tendencies increase - more impatient - you are worse off
Disgusted participants did not show myopic tendency - again challenging the valence-based approach
=> Can add the Capra et al. (2010) study on the effect of mood on the WTP in bidding behaviour

Question 13

7. Interpersonal decision-making

Answer 13

Emotions are inherently social and may serve three functions in interpersonal decision-making

1. help individuals understand one another’s emotions, beliefs and intentions
2. incentivise or impose a cost on others’ behaviour
3. evoke complementary, reciprocal, or shared emotions others

Question 14

8. How can you minimise bad effects of emotion on decision-making

Answer 14

• Minimise the magnitude of the emotional response e.g. through time delay, reappraisal, or induction of a counteracting emotional state
• Separating the judgement from the emotion

How?
1. Time Delay: if you get angry, wait for a few seconds, dot delay the time between the emotion and the actions - antithetical to function of emotional states which can render us out of control if actions are inherently immediate
2. Reappraisal: reframe the stimuli that led to the response e.g. it is just a test, after receiving a poor exam grade
=> reduces self-reported negative feelings and mitigates physiological responses to those events
3. Load your cognition with facts about the decision instead of emotion e.g. if you crave donuts, think of how many calories, time spent at the gym, etc.

Question 15

Rick and Loewenstein (2008)***

Answer 15

Assume that decision-makers choose between alternative courses of action by assessing

a) the desirability and
b) likelihood of their consequences (utility) and integrating this through utility maximisation.

Expected emotions= anticipated to occur as a result of the outcomes associated with different possible courses of action.
key feature:
- experienced when the outcomes of a decision materialise, but not at the moment of choice - expectations of future emotions

Immediate emotions: experienced at the moment of choice and fall into two categories:

• Integral emotions (feelings arising from the decision integral at hand)
• Incidental emotions (feelings at the time of decision not normatively relevant for deciding)

Integral emotions might provide decision-makers with information about their own tastes
Incidental emotions pose a more challenge to the utilitarian perspective because they are by definition irrelevant to the decision at hand and any influence of incidental emotions are unrelated

Question 16

Behavioural economics

Answer 16

a sub-discipline of economics that incorporates psychological assumptions to increase the explanatory power of economic theory

Question 17

State the assumptions of the expected utility theory and one violation

Answer 17

STANDARD MODEL - EXPECTED UTILITY THEORY
- Main assumptions: Completeness, Transitivity, Continuity and Independence.
- Main implications:
1. Linear in probability
2. The utility function satisfies convexity and monotonicity
3. Utility is defined over final wealth rather than fain and losses
4. Preferences are independent of the manner in which prospects are described
=> assumes people focus on how potential outcomes affect their overall wealth and utility is based on the integration of that outcome with all assets accumulated to that point => does not consider gains and losses

Unrealistic assumptions
- Kahneman (1979) - isolation effect
Individuals perceive gains and losses differently - loss aversion
Instead of looking at things over wealth, we look at them in terms of gains and losses

Question 18

Innovations involving expected emotions

Answer 18

• relax the assumption that utility is defined strictly over realised outcomes
• gains and losses are defined relative to expectations, rather than the status quo
• suppose you anticipate a pay rise of $10K and receive a $5K rise instead. Although the raise is a gain relative to your wealth, relative to your expectations it is a loss.

Question 19

Regret theory

Answer 19

Regret: counterfactual emotion that arises from a comparison between the outcome one experiences as a consequence of one’s decision and the outcome one could have experienced as a consequence of making a different choice.
Loomes and Sugen 1982 - predicted that regret aversion would lead to violatins of the EU model e.g. monotonicity (more is better) and transitivity

Gilbert et al (2004) the extent to which subway passengers regretted missing the train
Two groups:
1. Experiencers: who walked in a station within 6 minutes of missing the train and asked to report their feelings
2. Forecasters: who were asked to imagine how much regret they would feel if they missed

Results: Forecasters anticipated greater regret if they missed the train by 1 rather than 5 minutes
The anticipation effect is greater
Regret is often more salient in prospect than in retrospect

Question 20

Ariely and Loewenstein (2006)

Answer 20

The Effect of Sexual Arousal on Sexual Decision making

Two groups:

1. Control Group: cool state
2. Treatment group: asked to masturbate - hot state

asked to answer questions like are women’s shoes erotic, is a woman sexy when she is sweating and others directly measuring risk attitudes e.g. for contraception.

hypothesis: sexual arousal might interfere with the decision to use a condom and thus engage in risky behaviour.
arousal affected participants’ risk attitudes because of heightened state of emotions but not their risk perception

Question 21

Intertemporal Choice

Answer 21

How decision-makers choose between alternatives involving costs and benefits that are distributed over time
The discounted utility (DU) is the dominant model of inter-temporal choice in econmics
The DU model assumes that utility (and thus expected emotion) is only a function of realised outcomes
If people devalue future emotions they should want to experience pleasurable outcomes immediately and postpone painful outcomes whenever possible.

Question 22

Loewenstein (1987)

Answer 22

Utility from anticipation - people derive utility from savouring future good outcomes and disutility from dreading bad outcomes
e.g. group of students asked whether they prefer Friday or Sunday, most preferred Friday due to the anticipation of the weekend, even though they had school on Friday as opposed to Sunday.

Question 23

Implications of the Discounted Utility Model

Answer 23

Time is discounted at a constant rate => constant discount factor
=> implies time consistency
=> empirically observed discount rates are not constant over time, discount rates vary across different types of inter temporal choices

Violations:

1. gains are discounted more than losses
2. small amounts are discounted more than large amounts
3. isolation effect - outcomes considered singly

Example:
Preference Reversal: 
Would you prefer to get:
A) 110 in 31 days
B) 100 in 30 days

Would you prefer to get:
C) 110 tomorrow
D) 100 today

Subjects chose A and D - inconsistent with constant DU- we discount the future heavily = we are impatient!
Present bias
Models of hyperbolic discounting assume that discounting leads to impulsive behaviour by diminishing the importance of expected emotions - increasing discount factor, decreasing discount rate.

Question 24

McClure et al. (2004)

Answer 24

Test the brain activity of participants using fMIR and had to make inter-temporal decisions for rewards
=> Test whether there were brain regions that showed elevated activation when they made decision regardless of the delay

Results:
The people who show more immediate results had the emotional part of their brain activated
- present bias illicit this part of the brain
- suggest that the experience of immediate emotion rather than expected emotion drives impulsivity.
-> present bias if more beta areas than delta areas are elicited

Question 25

Sanfey et al. (2003)***

Answer 25

Emotion in Ultimatum Game
Proposer makes an offer to responder (10-x, x).
Responder can either accept or reject the offer in which case they both get 0.
Under RCT, a rational money-maximising individual would offer the least amount possible and the responder would always accept
however: we see that there is a fair split, why? guilt aversion.
Interested in the neural and behaviour reactions in unfair offers - in both emotional and cognitive processing in the brain

Wanted to see which areas of the brain are activated when subjects face

1) fair offers relative to unfair offers and
2) offers from a human partner and a random computer, and wanted to test the difference between the two outcomes.

Results:
1. As offers became unfair, lower acceptance rate => negative relationship between acceptance rate and the anterior insula where there are negative emotions like anger. the more present the anterior insult, the more likely to reject unfair offers
=> supports the importance of emotional influences in human decision-making
2. More likely to reject from a human than a computer whereas standard economic theory would say it is irrelevant
CRITICISM: small SAMPLE (19 participants)

Question 26

Integral emotions in social preferences

Answer 26

In the lab, subjects were more willing to compensate others who lost money when the losers had already been determined than when they were about to be
In the field, people contributed more to a charity when their contributions would benefit a family that had already been selected - identifying with the family = tole of integral emotion => triggered by identification

KandT - we have dual systems of the brain, one is more deliberate and systematic, the other is more emotional and is based on impulse and heuristics

Question 27

What are the 4 functions of Salovey et al. (2008) model of EI?

Answer 27

Emotional Intelligence = the ability to perceive and express emotions, to understand and use them, and to manage emotions so as to foster personal growth

Model of Emotional Intelligence (EI):

1. Perception, Appraisal and EMOTION EXPRESSION= identifying with others’ emotions
2. EMOTIONAL FACILITATION of thinking= redirect and prioritise one’s thinking based on the feelings associated with others
3. Understanding and analysing emotional information
4. regulation of emotion

Measuring emotional intelligence
Self-reported measure through the TMMS scale which asks people on a scale

Limitations:
People could be lying
Might be unaware of their own emotional intelligence and state

Question 28

Yip and Cote (2013)

Answer 28

Emotional intelligence and the effect of incidental anxiety => they propose that emotional intelligence help individuals discount the effects of anxiety that is unrelated to current decisions involving risk.

Hypothesis: individuals with low EI and anxiety induction reduce risk taking.
Two experiments:
1.
Measure of:
a) Emotional intelligence asked to select the best answer among a set of questions of the MSCEIT
b) risk taking where participants were asked to choose which gamble they preferred:
Gamble A: 100% chance of winning $1 or
Gamble B: 10% chance of winning $10 and 90% chance of winning nothing => more risky

Manipulation check - asked participants to check whether they felt anxious, and check whether the anxiety-induced people were actually nervous.

Result:

1. Manipulation of anxiety was successful - participants in the incidental anxiety condition reported higher anxiety than neutral state.
2. negative effect of incidental anxiety on risk-making among individuals with lower emotional intelligence and no effect for those with higher emotional intelligence

• experiment 2 controlled for cognitive ability and hypothesised that HIGHER EMOTIONAL INTELLIGENCE reduces the effect of anxiety because they are more aware.
• THEY WOULD KNOW THAT INCIDENTAL ANXIETY IS IRRELEVANT GIVEN WRITTEN INFO THAT THEY MAY FEEL ANXIOUS
• EI beneficial because it limits the negative effect of anxiety on risk-taking*