Long held to be decisions should be made using only logic, numerous studies in decision science and behavioral finance have demonstrated how emotions play a huge part in financial decision-making processes.
Studies suggest that emotions may help improve decision making; whether they help or hinder depends on how we experience and manage our feelings.
1. Emotions are a result of stimuli
Emotions have long been recognized to play an integral role in decision making by shaping how we perceive and evaluate information. Simply put, emotions may help determine whether a certain stimulus should be pursued further – something especially pertinent when dealing with finances.
Individuals with higher affective influence regulation tend to achieve superior decision-making performance. Furthermore, the effects of feelings on decisions depend on their context of occurrence; for instance, those considering potential losses focus on how much wealth could be lost as opposed to considering all their assets as potential gains.
At first glance, such stimuli may seem intimidating and involve large sums of money; these emotions may lead to anxiety and fear among decision-makers, however if they can detach from them they could make better financial decisions.
2. Emotions are a result of hormones
Hormones produced by our endocrine system help regulate physical aspects of our bodies, such as growth and development. For humans, hormones also impact how we feel and act; for example cortisol has been linked with feelings of anger and fear; they also influence interactions with others as well as beliefs and perceptions.
Though experiments investigating how emotions and hormonal responses interact may be limited, there is ample evidence that emotional contexts have an effect on levels of glucocorticoids and catecholamine hormones (i.e. testosterone and estradiol) [92].
Important restrictions of this review and meta-analysis warrant consideration. First, it’s possible that between-group effects reflect only participants’ reactions to being instructed to regulate emotions rather than any true effect on hormone levels; future research incorporating manipulation checks could help tease this out further. Furthermore, too few studies provided data regarding other potential sources of heterogeneity (such as gender and age). Therefore formal moderator analyses could not be conducted properly.
3. Emotions are a result of expectations
No matter whether it’s related to money or your child’s behavior, emotions will unavoidably play a part. Unfortunately, misapplying them to a decision could be disastrous.
Researchers have discovered that one’s prior expectations can impact their response to future outcomes. For instance, college students who expect to do poorly on exams tend to be more dismayed with their scores than those expecting success.
Emotions can also have a lasting effect on decisions that take time to make, such as choosing between options during a business negotiation or job interview. Being happy could lead to choosing an alternative with greater risk or reward than usual due to happiness priming a goal of reward replacement while anxiety primes one of uncertainty reduction.
4. Emotions are a result of beliefs
Research continues to demonstrate the many ways emotions influence decision making. Anger or fear can speed up decision making processes while sadness or envy slow them down. Emotions also provide important information about choices; anxiety may prompt someone to rely on heuristic cues while sadness could trigger the desire for risk reduction through reward substitution.
Individual’s perceptions can also influence decisions. Anticipating positive feelings may make us become excited even when the actual circumstances don’t call for it.
Scientists remain divided as to whether feelings introduce unwanted bias into decision making. Some researchers assert that the impact of emotions on decision making depends on how people manage them – for instance if an individual believes their emotions stem from just causes then any bias-inducing effects should dissipate.