Saturday, November 08, 2014

Summary of Emotion Lecture

I am currently giving a set of lectures as part of a module "Behavioural Economic: Concepts and Theories" in Stirling. I am posting brief informal summaries of some of these lectures on the blog to generate discussion. Thanks to Mark Egan for a lot of help in putting these together online.

This lecture covered Emotions and Decision-Making. There were four main threads, summarized briefly below:

(i) Emotions and Perception
The first idea is that emotions can influence decisions through altering temporarily altering perceptions of benefits, costs, intertemporal tradeoffs and risks. The main article for this is the Loewenstein article on visceral effects. In this sense, emotions are seen as acting as barriers to fully rational decisions. There is a strong link back to the topic of intertemporal choice as visceral effects can be seen as the underlying cause for why we place such a heavy weight on the immediate present.

(ii) Emotions and Economic Behaviour
The second idea is that emotions play an important role in how people behave in economic interactions. In particular, emotions such as anger, spite and indignation may lead people to make decisions that are different to predictions from rational choice. For example, people frequently reject lower than 50-50 amounts in the Ultimatum game. One reason for this is that they feel slighted by an unfair offer.

Here is a video showing two monkeys co-operating with each other even though the dominant strategy for the second would have been to keep all the stuff. This video shows the "cucumber-grape" demonstration I was telling you about where one monkey becomes enraged when the other monkey is rewarded with a better prize for doing the same task. These studies show that monkeys, as well as humans, process unfairness in this fashion.

I also talked about a famous neuroeconomic study which shows that brain areas associated with the limbic system light up when people are presented with unfair offers and that this predicts rejection of the offer.

(iii) Rational Emotions
The third idea, related to the second, is that emotions may themselves be influenced by rational considerations. In this sense, even extreme emotions such as hatred, anger, outrage etc., can be thought of as methods for coordinating interest groups in political bargaining games. The main article for this on the reading list is The Political Economy of Hatred by Edward Glaeser.

(iv) Emotions & the future
The fourth main idea is that we are bad at predicting how our emotions will respond to changes in events, an area of study called affective forecasting. Related to this is the focusing illusion which can be summarized by Kahenman's quote "Nothing in life is as important as you think it is, while you are thinking about it" - basically people tend to overproject their present affective states into the future, without correcting for future changes in circumstances or perspective. This paper about the "focusing illusion" by Kahneman and colleagues is one of the simplest and most useful in this area. The paper argues that income does not make us happier even though we act on the basis that it does. They claim this is due to a pervasive feature of human predictions of their emotional response which is a variant of the representativeness heuristic.

Elster (1984), Ulysses and the Sirens, Cambridge University Press.
Elster (1996), Rationality and the Emotions, Economic Journal, Royal Economic Society.
Elster (1998), Emotions and economic theory, Journal of Economic Literature.
Glaeser (2005), The Political Economy of Hatred, The Quarterly Journal of Economics.
Kahneman et al. (2006), Would You Be Happier If You Were Richer? A Focusing Illusion, Science.
Loewenstein (1996), Out of control: visceral influences on behavior, Organizational Behavior and Human Decision Processes.
Loewenstein (2000), Emotions in economic theory and economic behavior, American Economic Review
Sanfey et al. (2003), The Neural Basis of Economic Decision-Making in the Ultimatum Game, Science.
Wilson & Gilbert (2003), Affective forecasting, Advances in Experimental Social Psychology.


Pat Hoddinott said...

Great stuff. Very much ties in with the qualitative research we have been doing with new parents and infant feeding decisions - which seem to be driven by emotions rather than rational thinking about the longer term consequences.

Pelin Ö. said...

These are great resources! Do you happen to know more about research regarding consumer decision making and the influence of emotions?

I want to apply established and new theories of behavioral economics to commercial business.

thank you