Visiting my family this week and through Thanksgiving, I’ve been helping my mother rearrange old photographs, scan some for our online family tree, and place many into albums that will protect them for the future. One of her favorite observations about me is, “You were such a happy baby.”
My personality hasn’t changed much. I generally don’t let myself be bothered by the annoyances of life. Except in a few circumstances, stress just rolls off me. I have a generally positive outlook for the future, and I always have had this approach, even when my life didn’t look like it was heading in the right direction.
I could have pitied myself and been sad about being in debt, with no place to live and no job, but sadness for myself is just not part of my emotional toolbox. It turns out that this approach to life, maintaining a focus on happiness and avoiding sadness, may be financially beneficial.
A new study published in Psychological Science shows how sadness can be costly. While philosophers have theorized that sadness makes a person wiser, and this hypothesis has been supported by studies in the past, this new study also measures on what the researchers call “myopic misery.” Sadness causes people to more frequently make decisions that result in a financial gain today at the expense of long-term growth.
The study pits the two competing hypotheses against each other. The first supposes that sadness, with a resulting realistic view of the world, will give subjects an opportunity to carefully consider their choices when faced with a financial decision. The second hypothesis supposes that sadness will result in a desire for immediate gratification and increased impatience, often at odds with better long-term decision-making.
The researchers from Harvard University and Columbia University used several experiments to test these hypotheses. Participants watched short videos designed to elicit one of two emotional responses, sadness and disgust, or a video that is designed to elicit a neutral response. The research team then asked each participant to write an essay about a time when they experienced the emotion to which he or she was assigned.
After the subjects were successfully emotionally primed, each was asked to choose the better financial condition. There were 27 questions, each with a different choice. The choices were between receiving cash today, in amounts between $11 and $80, and receiving a larger amount of cash, between $28 and $85, some time in the future, from one week to six months. Participants were randomly selected to actually receive the cash in the form they chose, and this helped incentivize the participants to be truthful about their preferences.
The results were significant. “Sad participants were more impatient than neutral participants in their choices, i.e., more willing to forego larger rewards in the future to obtain smaller rewards now… In monetary terms, whereas the median sad participant accepted $37 today rather than wait 3 months to receive $85, the median neutral participant required $56 today.”
There was no significant difference between neutral participants and disgusted participants, thus the impatience is not a result of negative emotions in general, but a result of sadness in particular.
This was one of three experiments in the study, and all agree that sadness increases impatience and causes people to make financial decisions that might provide gratification today but could harm finances in the long term. This shouldn’t surprise anyone who has heard of the term “retail therapy.” To improve mood, some people are willing to go shopping. The desire to shop can be at odds with the need to stick to a budget or remain out of credit card debt.
Unfortunately, people are often asked to make important financial decisions when dealing with sadness. As the report discusses, someone dealing with the death of a family member is often asked to settle the deceased individual’s estate. These decisions can have long-term implication for the family, but they often need to make quickly.
You cannot completely disconnect emotions when making financial decisions. Human beings are not primarily logical. Emotions play a crucial role in our brains for survival, but the best decisions can only be made when we account for the potential emotionally-driven mistakes. Even the best minds in the world of finance can be affected by their emotions, even as they recognize the struggle between emotions and logic.
We can prevent financial mistakes by recognizing sad moods and refraining from financial decision-making during those periods of time. Shop when you’re happy. Have someone unaffected help you make decisions when dealing with a loved one’s passing.
Unfortunately, these solutions won’t always work for people who have a psychological condition for which sadness is more than a bad mood that will go away soon. People in these conditions may need long-term or permanent help making the best decisions for the future.
Those who have control over the life outlook would see a benefit by adjusting their views of the world towards a more positive, happy approach. There is a lot to be happy about, including the potential of avoiding decisions that can hurt prospects for financial freedom in the future.
Updated June 20, 2014 and originally published November 15, 2012.