From Handbook of Emotions, Third Edition, edited by Michael Lewis, Jeannette M. Haviland-Jones, and Lisa Feldman Barrett. Copyright 2008 byThe Guilford Press.Allrightsreserved. CHAPTER 9 The Role of Emotion in Economic Behavior SCOTT RICK and GEORGE LOEWENSTEIN IMMEDIATE AND whether to purchase a stock, she might imagine EXPECTED EMOTIONS the disappointment she would feel if she bought it and it declined in price, the elation Consequentialist Models of Decision Making she would experience if it increased in price, and possibly emotions such as regret and relief Economic models of decision making are that she might experience if she did not pur- consequentialist in nature; they assume that de- chase the stock and its price either rose or fell. cision makers choose between alternative The key feature of expected emotions is that courses of action by assessing the desirability they are experienced when the outcomes of a and likelihood of their consequences, and inte- decision materialize, but not at the moment of grating this information through some type of choice, at the moment of choice they are only expectation-based calculus. Economists refer cognitions about future emotions. to the desirability of an outcome as its “utility,” Immediate emotions, by contrast, are experi- and decision making is depicted as a matter of enced at the moment of choice and fall into one maximizing utility. of two categories. “Integral” emotions, like ex- This does not, however, imply that con- pected emotions, arise from thinking about the sequentialist decision makers are devoid of consequences of one’s decision, but integral emotion or immune to its influence. To see emotions, unlike expected emotions, are expe- why, it is useful to draw a distinction between rienced at the moment of choice. For example, “expected” and “immediate” emotions in the process of deciding whether to purchase (Loewenstein, Weber, Hsee, & Welch, 2001; the stock, Laura might experience immediate Loewenstein & Lerner, 2003). Expected emo- fear at the thought of the stock’s losing value. tions are those that are anticipated to occur as “Incidental” emotions are also experienced at a result of the outcomes associated with differ- the moment of choice, but arise from ent possible courses of action. For example, if dispositional or situational sources objectively Laura, a potential investor, were deciding unrelated to the task at hand (e.g., the TV pro- 138 9. The Role of Emotion in Economic Behavior 139 gram playing in the background as Laura called her brokerage house).1 The notion of expected emotions is perfectly consistent with the consequentialist perspective of economics. Nothing in the notion of utility maximization rules out the idea that the utility an individual associates with an outcome might arise from a prediction of emotions; for exam- ple, one might assign higher utility to an Italian restaurant dinner than a French restaurant din- ner because one anticipates being happier at the former. While not explicitly denying the FIGURE 9.1. Consequentialist model of decision making. idea that utilities might depend on expected emotions, however, most economists until re- cently viewed detailed accounts of such emo- tions as outside the purview of their discipline. opportunity. Marketers also attempt to cap- Integral immediate emotions can also be in- italize on immediate emotions—for example, corporated into a consequentialist framework, charitable organizations that make potential although it takes one farther afield from con- donors feel guilty about what they squander ventional economics. Integral emotions, it can their money on while less fortunate people and in fact has been argued, might provide de- starve. cision makers with information about their The food industry is particularly motivated own tastes—for instance, to help inform Laura to capitalize on immediate emotions. Mrs. of how she would actually feel if she purchased Field’s Cookies, for example, has been known the stock and it rose or declined in value. How- to pump enticing cookie smells into the atmo- ever, this assumes, contrary to the usual as- sphere of shopping malls to stimulate hunger sumption in economics, that people have an (Hoch & Loewenstein, 1991). A company imperfect understanding of their own tastes. named “ScentAir” sells similar odors (e.g., An influence of incidental immediate emo- “Glazed Donut,” “Iced Cinnamon Pretzel,” tions on decision making would pose a much “Blue Cotton Candy”) to businesses looking to more fundamental challenge to the consequen- stimulate hunger.2 By contrast, the dieting in- tialist perspective, because such emotions, by dustry often attempts to market its services by definition, are irrelevant to the decision at focusing people on the positive emotions they hand. Any influence of incidental emotions can anticipate experiencing once they are fi- would suggest that decisions are influenced by nally able to fit into the perfect pair of jeans. factors unrelated to the utility of their conse- quences. Enter Behavioral Economics Figure 9.1 presents a schematic representa- tion of the traditional perspective of econom- Fortunately, many economists would view the ics. Although immediate emotions are repre- snapshot of their discipline presented above as sented in the figure, they would not be part of outdated. This is largely attributable to the any traditional economist’s representation of advent of “behavioral economics,” a subdis- their framework, because they play no role in cipline of economics that incorporates more decision making; they are “epiphenomenal” psychologically realistic assumptions to in- by-products of, but not determinants of, deci- crease the explanatory and predictive power of sions. economic theory. The field first achieved prom- However, a great deal of market activity can inence in the 1980s and has been gaining influ- be understood in terms of both expected and ence since then. And much of the thrust of immediate emotions. Much advertising at- behavioral economics has involved, or at least tempts to inform consumers, whether accu- could be construed as involving, an enhanced rately or not, about emotions that they can ex- understanding of emotions. pect to feel if they do or do not buy a particular The first, and less controversial, interaction good. “One-day-only” sales, for example, are of behavioral economics with emotions was to probably effective because they make consum- question the neglect of the topic and to begin to ers think that they will regret not seizing the examine exactly how utility depended on out- 140 I. INTERDISCIPLINARY FOUNDATIONS comes. For example, whereas conventional EU assumes that people choose between alter- economics assumes that the utility of an out- native courses of action by assessing the come depends only on the outcome itself, some desirability or “utility” of each action’s possi- economists showed how counterfactual emo- ble outcomes and linearly weighting those utili- tions (e.g., regret), which arise from consider- ties by their probability of occurring. The nor- ing alternative outcomes that could have oc- mative status of the EU model was enhanced by curred, can influence decision making. Note von Neumann and Morgenstern’s (1944) dem- that these analyses focus on expected emotions onstration that it could be derived from a prim- and hence help to elaborate the connection itive, intuitively appealing set of axioms—for among outcomes, emotions, and utility, but do example, that preferences are transitive (if A is not challenge the consequentialist perspective. preferred to B, and B is preferred to C, then A More recently, economists as well as psy- should be preferred to C). In addition to its chologists who are specifically interested in de- normative appeal, this model’s assumption that cision making have begun to take greater ac- decisions are based on EU, rather than ex- count of immediate emotions. Some of the pected value, gives it descriptive appeal as well. research has shown that immediate integral For instance, it assumes that the difference in emotions play a critical role in decision mak- happiness (i.e., utility) between winning $1 and ing. However, other research has shown that winning $2 is not necessarily equal to the dif- immediate emotions, and especially but not ex- ference in happiness between winning $101 clusively incidental emotions, often propel de- and winning $102 (though the difference in cisions in different directions from expected value is equal). emotions—that is, in directions that run con- However, empirical research has docu- trary to the predictions of a consequentialist mented many behavioral phenomena that are perspective. The new research thus suggests inconsistent with the basic axioms, and thus in- that the consequentialist perspective is much consistent with the predictions of the EU too simple to be a descriptively valid account of model, and many of these anomalies can be at- actual behavior. tributed to unrealistic assumptions about the In this chapter, we review some of the critical determinants of expected emotions and the in- (consequentialist) assumptions and predictions fluence of immediate emotions. Several models of the dominant economic models of risky deci- have accounted for some of these anomalies by sion making, intertemporal choice, and social making more realistic assumptions about the preferences. For each of these areas, we first determinants of expected emotions. We next discuss behavioral phenomena that are anoma- review some of