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Behavioral research studies show that ³feeling sad´ may cause people to
overpay for commodities at the rate of 30-300% more than they otherwise
would.When it comes to spending, are you rational, or does emotion play a
larger role?
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Ñf you are depressed or even a little bit sad, keep your wallet at home. That¶s the
advice from experiments conducted by social psychologists at Harvard, Stanford
and other universities. Behavioral research studies show that ³feeling sad´ may
cause people to overpay for commodities at the rate of 30-300% more than they
otherwise would. This research of course, flies in the face of New Classical
economists claiming most individual consumers evaluate and make rational
purchasing decisions. When it comes to spending, are you rational, or does
emotion play a larger role?

A PBS special, ³Mind over Money´ mentions two schools of thought in economic
decision-making; rationalists vs. behavioralists. The rationalists assume that
consumers are completely rational, evaluating all available alternatives in a world
of perfect information. Behavioralists, on the other hand, believe that emotion,
excitement, and mood play a larger role in economic decision-making than
previously considered.

A research report titled ³Misery is Not Miserly´ sheds some light on which line of
thinking currently has the upper hand.

Ñn a study, researchers hypothesized that people who ³feel sad´ and are more
³self-focused´ tend to spend more for commodities. To prove this hypothesis,
psychologists set up two groups in different rooms. The test group was shown a
sad video clip (the death of a boy¶s mentor from ³The Champ´), asked to write an
essay, and then instructed to buy sporty water bottle. The baseline group was
given the same task, but instead of watching the emotional video clip, members
viewed a National Geographic segment on the Great Barrier Reef.

Though rationalists would say that there shouldn¶t be any emotion carry-over
effects from watching the scene from ³The Champ,´ the group exposed to the
tragic video scene tended to pay up to four times more for the water bottle than
the control group. This, in spite of many of the control group participants claiming
the video did not affect their decision-making!

The researchers surmise that ³sad and self-focused individuals spend more on
commodities than other people do because they seek self-enhancement.´ This in
turn allows them to ³increase the valuation of possessions that one might
acquire.´ Ñn other words, people feeling sad or even depressed may find
themselves overpaying for items in an effort to improve their state of mind.

Perhaps at this point you may be thinking that an experiment with water bottles
has little relevance in your daily decision-making. Harvard social psychologist
Jennifer Lerner would counsel you otherwise. She says, ³(These) experiments
have been done with high stakes money²a thousand dollars, etc.,²and what
we find is that these results scale up, even when you use big money.´
Rational economists like John Cochrane from the Chicago School of Economics
say emotions matter very little in economic decision-making. ³The observation
that people feel emotions means nothing,´ he says. ³Ñf you¶re going to just say
markets went up because there was a wave of emotion, you¶ve got nothing. That
doesn¶t tell us what circumstances are likely to make markets go up or down.
That would not be a scientific theory.´

Counter that statement with Harvard¶s Lerner, who claims emotions play a pretty
significant role in economic decision-making, especially when experiments show
sad and self-focused people spend more than they should.

The conclusions drawn from this debate matter very much, especially
considering economic thought over the past 40 years has centered on rational
decision-making. Ñf rational decision-making isn¶t the norm for consumers, it may
be time to take a fresh look at the power of emotion in driving daily purchasing
decisions.

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