Buy high, sell low: Emotions turn economic decisions on their head, says Carnegie Mellon study
PITTSBURGH--Seemingly incidental emotions can influence the prices at which individuals buy and sell goods, according to a groundbreaking study by researchers at Carnegie Mellon University.
While prior research has found that people set a higher price for objects they own than they themselves would be willing to pay--which economists call the endowment effect--the Carnegie Mellon study found that people who are sad actually are willing to accept less money to sell something than they would pay for the same object. The researchers also found that when people experience disgust, both buying and selling prices fall. This multidisciplinary study will be published in the May edition of Psychological Science, the prestigious journal of the American Psychological Society.
"We're showing for the first time that incidental emotions from one situation can exert a causal effect on economic behavior in other, ostensibly unrelated situations," said Jennifer Lerner, an assistant professor of social and decision sciences and psychology. Lerner co-authored the study with Economics Professor George Loewenstein and Deborah Small, a doctoral student in the Department of Social and Decision Sciences who soon will be joining the faculty at the Wharton School of Business at the University of Pennsylvania.
To study the effects of sadness on economic behavior, Lerner and her colleagues had one group of participants watch a scene from the film "The Champ" in which a young boy's mentor dies. The researchers elicited disgust in another group by showing a clip from the movie "Trainspotting" in which a man uses an unsanitary toilet. To augment their emotional states, the participants were asked to write about how they would feel in situations similar to those portrayed in the movies. Individuals were then given the opportunity to either sell a highlighter set they were given, or set a price that they would be willing to pay to buy a highlighter set. The study participants then actually bought and sold the highlighters.
The researchers concluded that sadness triggered an implicit need for individuals to change their circumstances, thus a greater willingness to buy new goods or to sell goods that they already had, while disgust made people want to get rid of what they had and made them reluctant to take on anything new, depressing all prices. When asked whether emotion played a role in their decisions, participants said no, indicating that they were unaware that their emotional state could be costing them money. The researchers already have replicated their results in another experiment.
"As a developing field, we're now increasingly able to predict non-intuitive ways in which emotions exert their effects. And we can document that incidental emotions matter even when real money is at stake," Lerner said.
The implications are numerous and significant. It could shed light on the economic consequences of highly emotional events, such as the Sept. 11 terrorist attacks, suggesting that such events could encourage rather than discourage consumer spending, depending on the emotional reactions they evoke. Understanding the contradictory effects emotions can have on economic decisions could alter traditional principles of marketing and negotiations, equip consumers to make better decisions and change how economists interpret the performance of financial markets.
Source: Eurekalert & othersLast reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
Published on PsychCentral.com. All rights reserved.