November 24, 2012
Sad People Choose Short Term Over Long Term Rewards

Feeling sad? Try to cheer yourself up before making financial decisions.

Using data collected at the Harvard Decision Science Laboratory and the Center for Decision Sciences at Columbia, the authors found that subjects randomly assigned to view a video that induced sadness exhibited impatience and myopia, which were manifested in financial decisions that elicited higher gains in the short term, but lesser gains over the longer term. Thus, subjects in the sadness condition earned significantly less money than subjects in the neutral condition. They showed what is known as “present bias,” wherein decision makers want immediate gratification and so they ignore greater gains associated with waiting.

You will make better decisions of you are feeling neutral.

“Across three experiments, the median sad participant valued future rewards (i.e., those delayed by 3 months) 13% to 34% less than did the median neutral-state participant. These differences emerged even though real money was at stake and even though discount rates in the neutral condition were already high,” the authors reported.

Sadder but wiser? Not always.

“These experiments, combining methods from psychology and economics, revealed that the sadder person is not necessarily the wiser person when it comes to financial choices,” they concluded. “Instead, compared with neutral emotion, sadness — and not just any negative emotion — made people more myopic, and therefore willing to forgo greater future gains in return for instant gratification.”

We need to manage our emotional state to optimize our decision making.

Share |      Randall Parker, 2012 November 24 08:19 PM 


Comments
Brett Bellmore said at November 25, 2012 7:30 AM:

"Present bias" might also be termed, "Realizing you're not immortal." One critical difference between short term and long term gain, is that you've got more reason to be confident you'll be around in the short run.

Considering that sadness might, in our evolutionary past, have correlated with having a poorer life expectancy, maybe it's perfectly reasonable that sad people prefer short term gains.

Also, consider that our potential welfare is truncated on the negative side: If your welfare goes down far enough, you die. This provides people whose welfare is already low a strong reason to prefer short term gain. The starving man has to eat his seed corn, because if he doesn't, he's not going to live to see that harvest, while if he does, something *might* come along to save him.

I think, in short, some of the simplifications made in these studies ignore very real reasons why people have a very high discount rate.

Mike Johnson said at November 25, 2012 1:02 PM:

The nexus between "sad people bias short-term rewards over long-term rewards" and "depressed people more accurately model reality than happy/non-depressed people" (another finding in the last few years) is interesting.

Lono said at November 26, 2012 12:51 PM:

Since I have made several irrational impulse purchases since being unexpectedly laid off last week - I would have to say my experience is in excellent agreement with this study. I did make the conscious choice not to drink during the last holiday - so I probably actually ended up financially ahead. In any case I foresee a few more cyber Monday purchases in my immediate future.

Anyone looking for a drug/disease free Systems Analyst?

;-)

Randall Parker said at December 2, 2012 7:41 PM:

Lono,

What does a Systems Analyst do? Analyze requirements for software changes?

Lono said at December 10, 2012 10:26 AM:

Well according to Wikipedia:

A systems analyst researches problems, plans solutions, recommends software and systems, and coordinates development to meet business or other requirements.

http://en.wikipedia.org/wiki/Systems_analyst

I tended lately to be more on the Business Intelligence side - with an emphasis in report development, application development, and data validation for internal company departments.

The timing is unfortunate - as my Mensa based operation is not yet financially self-sufficient - but the job was largely unfulfilling - due mostly to rampant corruption within the organization.

After over 10 years of working for the same company, however, I feel a little like long term inmate finally paroled - who finds their unexpected freedom more awkward then empowering. I suspect the feeling will pass... If you are open to it - I might hit you up privately for a little advice in the near future.

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