The heat of the moment is a powerful, dangerous thing. We all know this. If we’re happy, we may be overly generous. Maybe we leave a big tip, or buy a boat. If we’re irritated, we may snap. Maybe we rifle off that nasty e-mail to the boss, or punch someone. And for that fleeting second, we feel great. But the regret—and the consequences of that decision—may last years, a whole career, or even a lifetime.

At least the regret will serve us well, right? Lesson learned—maybe.

Maybe not. My friend Eduardo Andrade and I wondered if emotions could influence how people make decisions even after the heat or anxiety or exhilaration wears off. We suspected they could. As research going back to Festinger’s cognitive dissonance theory suggests, the problem with emotional decisions is that our actions loom larger than the conditions under which the decisions were made. When we confront a situation, our mind looks for a precedent among past actions without regard to whether a decision was made in emotional or unemotional circumstances. Which means we end up repeating our mistakes, even after we’ve cooled off.

I said that Eduardo and I wondered if past emotions influence future actions, but, really, we worried about it. If we were right, and recklessly poor emotional decisions guide later “rational” moments, well, then, we’re not terribly sophisticated decision makers, are we?

To test the idea, we needed to observe some emotional decisions. So we annoyed some people, by showing them a five-minute clip from the movie Life as a House, in which an arrogant boss fires an architect who proceeds to smash the firm’s models. We made other subjects happy, by showing them—what else?—a clip from the TV show Friends. (Eduardo’s previous research had established the emotional effects of these clips).

Right after that, we had them play a classic economics game known as the ultimatum game, in which a “sender” (in this case, Eduardo and I) has $20 and offers a “receiver” (the movie watcher) a portion of the money. Some offers are fair (an even split) and some are unfair (you get $5, we get $15). The receiver can either accept or reject the offer. If he rejects it, both sides get nothing.

Traditional economics predicts that people—as rational beings—will accept any offer of money rather than reject an offer and get zero. But behavioral economics shows that people often prefer to lose money in order to punish a person making an unfair offer.

Our findings (published in Organizational Behavior and Human Decision Processes) followed suit, and, interestingly, the effect was amplified among our irritated subjects. Life as a House watchers rejected far more offers than Friends watchers, even though the content of the movie had nothing to do with the offer. Just as a fight at home may sour your mood, increasing the chances that you’ll send a snippy e-mail, being subjected to an annoying movie leads people to reject unfair offers more frequently even though the offer wasn’t the cause of their mood.

Next came the important part. We waited. And when the emotions evoked by the movie were no longer a factor, we had the participants play the game again. Our fears were confirmed. Those who had been annoyed the first time they played the game rejected far more offers this time as well. They were tapping the memory of the decisions they had made earlier, when they were responding under the influence of feeling annoyed. In other words, the tendency to reject offers remained heightened among our Life as a House group—compared with control groups—even when they were no longer irritated.

So now I’m thinking of the manager whose personal portfolio loses 10% of its value in a week (entirely plausible these days). He’s frustrated, angry, nervous—and all the while, he’s making decisions about the day-to-day operations of his group. If he’s forced to attend to those issues right after he looks at his portfolio, he’s liable to make poor decisions, colored by his inner turmoil. Worse, though, those poor decisions become part of the blueprint for his future decisions—part of what his brain considers “the way to act.”

That makes those strategies for making decisions in the heat of the moment even more important: Take a deep breath. Count backward from 10 (or 10,000). Wait until you’ve cooled off. Sleep on it.

If you don’t, you may regret it. Many times over.

(this post first appeared in Harvard Business Review)

We have lots of discussions about how to get people to save more, which is clearly important.

But today I want to ask a question about spending money: Assume you had $20,000 to spend (and that you could not save it), what would be the ideal way to spend it?  In other words, what would be the way to spend this sum if your goal was to get the most joy and happiness out of this amount?

I am not asking because I have an answer, or even an idea of how to do research on this — I am asking because I really don’t know.

So — any input will be welcomed…

Irrationally yours

Dan

Would you pay $76 for a shot glass? What about $52 for an oven mitt? And $50 for a jar of marbles?

You may shake your head and say no way, but in a recent series of eBay auctions, the consumers did just that: they shelled out considerable cash for objects that to all appearances should never have fetched more than a couple bucks.

So what made the difference? Each item came with a unique tale.

The auctions were part of the Significant Objects Project, an experiment designed to test the hypothesis that “narrative transforms the insignificant into the significant.” Or, put differently, the goal was to determine whether you could take an object worth very little and make it worth much more by giving it a story, by endowing it with meaning.

To that end, the project’s originators – NY Times columnist Rob Walker and author Josh Glenn – bought up 100 unremarkable garage sale knickknacks for no more than a few dollars each, and then had volunteer writers whip up fictional back stories for them. This, they thought, would up the trinkets’ objective value.

They were right. Whereas the objects had cost Walker and Glenn a total of $128.74 to buy, the same trinkets netted a whopping $3,612.51 on eBay when paired with stories. This Russian figurine, for example, came with the original price tag of $3 but sold for $193.50. And this kitschy toy horse made the leap from $1 to $104.50. (See also:$76 shot glass, $52 oven mitt, $50 jar of marbles)

The results may seem surprising, but this is actually something we see all the time. It’s the basic idea behind the endowment effect, the theory that once we own something, its value increases in our eyes. (In one study, Kahneman, Knetsch and Thaler (1990) randomly divvyed up participants into mug owners and buyers, and found that whereas owners requested around $7 for their mugs, the buyers would only pay an average of $3.)

But ownership isn’t the only way to endow an object or service with meaning. You can also create value by investing time and effort into something (hence why we cherish those scraggly scarves we knit ourselves) or by knowing that someone else has (gifts fall under this category).

And then there’s the power of stories: spend a fantastic weekend somewhere, and no matter what you bring back – whether it’s an upper-case souvenir or a shell off the beach – you’ll value it immensely, simply because of its associations. This explains the findings of the Significant Objects Project, and also how other things like branding works

Irrationally yours

Dan

Recently I wrote a short summary of Christakis’s research for Time magazine 100 people of 2009.  Here is my summary of the research:

Social scientists used to have a straightforward, if tongue-in-cheek, answer to the question of how to become happy: Surround yourself with people who are uglier, poorer and shorter than you are – and who are unhappily married and have annoying kids. You will compare yourself with these people, and the contrast will cheer you up.

Nicholas Christakis, 47, a physician and sociologist at Harvard University, challenges this idea. Using data from a study that tracked about 5,000 people over 20 years, he suggests that happiness, like the flu, can spread from person to person. When people who are close to us, both in terms of social ties (friends or relatives) and physical proximity, become happier, we do too. For example, when a person who lives within a mile of a good friend becomes happier, the probability that this person’s good friend will also become happier increases 15%. More surprising is that the effect can transcend direct links and reach a third degree of separation: when a friend of a friend becomes happier, we become happier, even when we don’t know that third person directly.

This means that surrounding ourselves with happier people will make us happier, make the people close to us happier – and make the people close to them happier. But social networks don’t transmit only the good things in life.

Christakis found that smoking and obesity can be socially infectious too. If his thesis proves out, then the saying that you can judge a person by his or her friends might carry more weight than we thought.

In the wake of all this public anger over bankers’ salaries, and within weeks of taking office, Barack Obama is proposing “common sense” executive pay guidelines—at least in companies receiving government money. These measures call for executive salaries not to exceed $500,000; any further compensation could only be in the form of stocks, which can’t be sold until the government is paid back. No doubt this makes us feel better to some extent, but the question is, will it work?

I think not, and here’s why: if we were designing the stock market from scratch and offering people $500,000 a year plus stock incentives, I’m sure we would get lots of qualified people who would kill for this job, and not only for the salary but also as an important civil service to maintain the financial system on which we depend. But this is if we started from scratch, which we are most assuredly not. Instead we’re dealing with existing bankers who are accustomed to millions a year plus millions in stock options. These people have made up, over the years, a multitude of reasons why this is the least that they deserve for their efforts and skills (how many people can admit to being paid much more than they’re worth?). This is a problem of relativity. To these bankers, in view of their “normal” pay, it looks like an offensive and irresponsible offer. My guess is that they will not accept these conditions, or if they do, they’ll find other tricks to pay themselves what they think are “right” and fair wages, which is what they earned heretofore.

What would I have done if I’d been the financial czar in this situation? I would try to turn over a new leaf; incentivize the creation of new banks with a new pay structure; promote the idea that bankers are not greedy bastards but have a crucial social responsibility so that a whole new generation would take this approach and want these positions. The “old bankers” who feel they needed millions of dollars to do their jobs well could try and compete in this new market, but we’d see who actually wanted to bank with them when the alternative is a new bank with more idealistic underpinnings and a better, more realistic, and more transparent, salary structure.

I wrote this about 8 months ago — but it makes particular sense right now ….

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If (as is often the case) talking about sex makes people more interested in having it, does that mean that the current talk about a recession could actually be creating one? Well, maybe.

Or so one general finding of behavioral economics would have us believe. With all this chatter about a recession, consumers might, for example, hold off on buying that new dishwasher because of the “bad economy,” or pass up the more expensive restaurant because “we’re in a recession.” Without any discussion about recession, we’re unlikely to change our pattern of behavior. But talking about it can be a force that affects our decisions and alters our consumption habits.What makes me think that we’re such creatures of habit? Consider the experience of eating a Godiva truffle: The chocolate is melting in your mouth, the aroma penetrates your nose, there is a small nut inside. . . . Now think about this familiar experience and try to determine how much it’s worth to you. A quarter? $0.50? $0.75? $1.25? $2.50? While the experience of eating a truffle is very familiar, figuring out what we would be willing to pay for it proves difficult. So what do we do when we make purchasing decisions? (more…)

I would like to propose that one reason people oppose the government bailout is because they want revenge on the companies that helped lead us into this disaster. Even though they know they will lose money and it doesn’t help them at all, at a very basic level a part of them want to see the companies suffer. (more…)

Why are Americans so gloomy? It may be all about the yoked dog and ‘learned helplessness.’

We have a market paradox on our hands. Consumer confidence is close to a 40-year low, suggesting that the economy is in worse shape now than in times that seemed far darker, such as the early 1980s, when both inflation and unemployment crept into double digits. Yet many of the current economic indicators, including inflation and unemployment, are rather positive — or at least not as negative as consumer sentiment implies. (more…)

Dear Irrational,I dearly love your book. I now have a question.When my father passed away, I only had my mother left. I started to make more trips to Davenport, Iowa, to visit her on the weekends. I felt that I didn’t want to not know her in her old age when she died. (more…)

An interesting story about research on well-being and our understanding of it was published today in the NYT. The issue is whether people get used to new life circumstances and, as a consequence, their long-term happiness (well-being) is not affected. Basically, a large body of research on well-being suggests that people in general become used to new circumstances to an extent that is beyond their, and others’, initial estimates (Diener and Diener 1996; Diener and Suh 1997; Gilbert et al. 1998; Kahneman 1999; Schkade and Kahneman 1998). For example, it has even been suggested that people who sustain a substantial injury are not much worse off than people who have not (Brickman, Coates, and Janoff-Bulman 1978). The story in the NYT describes some new research that questions these findings.

Here are some personal reflections on this topic:
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