|
Emotions and Decision-Making
 “Perspective is everything,” says the common wisdom, and it explains why
people aren’t capable of making completely rational decisions. People perceive
whether an event is positive or negative—and categorize decisions as gain or
loss—based on a reference point. Called the framing effect, this notion predicts
that people tend to avoid risk when viewing a choice in a positive framework,
but seek risks if viewing a choice through a negative framework.
But according to recent Smith School research from Brent Goldfarb, associate
professor of management and entrepreneurship, and Myeong-gu Seo, assistant
professor of management and organization, feelings at work may help correct for
the framing effect, allowing people to make less biased decisions.
Seo and Goldfarb incorporated aspects of both lab experiments and field work
in their study. Participants were real-life day traders recruited from
investment clubs who received $10,000 in play money to invest. If their stock
picks did well, they were able to win up to $1,000 dollars, and even if they
lost all their play money they still received $100 for participating in the
study.
Participants experienced a range of pleasant and unpleasant emotions during
decision-making and were prompted to report and record those emotions.
“Researchers often talk about the effect of emotions on decision-making, but few
studies have actually measured emotions,” says Seo. “Instead of speculating, we
were able to capture information that allowed us to directly measure the impact
of emotion on decision-making.”
Seo and Goldfarb found that when participants felt very happy or very sad,
the framing effect was mitigated or even reversed. When participants experienced
large gains and were also very happy, they were less risk-averse or even
risk-seeking. When sad participants experienced a large loss, they became less
risk-seeking.
This may be because experiencing a gain may provide a context in which
potential gains appear more real to decision makers. Experiencing pleasant
feelings at the same time as a gain may increase the perceived possibility of
potential gains—increasing the willingness to take risks.
In contrast, experiencing a loss often puts individuals in a situation where
future losses seem more real. In this case, pleasant feelings may increase how
much value they attach to avoiding further losses, which overwhelms their
perception of potential gains—and thus decision makers become less willing to
take risks.
When unhappy participants in the study experienced a large loss they became
more risk-averse, also in contrast to the type of behavior predicted by the
framing effect. “When you’re already down, you shouldn’t be cautious. You should
just try for the Hail Mary pass to make up the loss,” says Goldfarb. “But we
found that people who were experiencing unpleasant feelings at the same time as
a loss actually become more risk-averse.”
The effects of unpleasant feelings had less of an effect on decision-making
than pleasant feelings, Seo and Goldfarb found. But extremely intense feelings,
both pleasant and unpleasant, didn’t just correct for the framing affect, but
actually reversed it—creating a different type of decision-making biases. In the
financial world, this helps illustrate how traders may be misled by their
intense feelings into mishandling their funds. Stock traders naturally feel
happy when they experience a gain, and unhappy when they experience a loss. But
in extreme cases, the happiness they feel may drive them to continue making
risky decisions, even though they should be risk-averse—fueling stock bubbles.
When the economic landscape looks bleak, traders naturally take more risks to
recover from their losses, but the strong unhappiness that they also experience
may drive them to become more risk-averse, exacerbating crashes or prolonging
economic downturns.
What can managers learn about how best to encourage more rational decision
making within their organizations? It may be worthwhile to foster a broad range
of affective experiences at work, say Seo and Goldfarb, particularly pleasant
feelings. In other words, creating a happy workplace may result in better
performance by individual employees and benefit the organization as a whole. But
don’t take it too far, they caution: experiencing extremely intense feelings at
work results in biased decision-making too. --RW
|