Good Mood, Good Decision
The Way You Feel Can Affect Financial Choices
As economic theories go, the notion that feeling good can lead to better financial decisions might be categorized as a commonplace truism, but in reality, the premise hadn’t been subjected to much rigorous experimentation until John Ifcher, assistant professor of economics, came along.
Ifcher and his SCU colleague Homa Zarghamee conducted a carefully controlled experiment with a group of Santa Clara undergraduates, which was reported in a paper, “Happiness and Time Preference: The Effect of Positive Affect in a Random-Assignment Experiment.” It was published in the December issue of the prestigious American Economic Review and its findings have been reported in the mainstream news media, including The New York Times, The Wall Street Journal, and the CBS News business website.
“Happiness appears to drive decision-making in a fundamental way,” Ifcher says. “If you are in a better mood, you have more self-control, more willpower, and that’s important in financial and life decisions. It’s surprising that no one has examined this before.”
The real-world applications can range from banks, brokers, and other financial companies investing effort into designing pleasant offices to effect a client's mood, to pension managers using video to stimulate employee investment decisions.
Ifcher says it was his interest in the relationship between happiness and self-control that drove him to conduct this experiment. He and Zarghamee, who has considerable experience in conducting experiments, carefully designed the protocols to stand up to scrutiny
To obtain subjects who would be broadly representative of the student body, they recruited students taking a required English course at Santa Clara University. Participants filled out a questionnaire asking a series of questions about how much money they would accept today in lieu of waiting for a larger amount at some point in the future (from 1 to 56 days). To ensure honest answers, the students were told that they would be paid based on their answer to a randomly selected question from the questionnaire.
Before completing the questionnaire, students were randomly assigned to one of two groups — the control or treatment group — and shown different video clips. Half of the subjects saw excerpts from Robin Williams Live on Broadway, which has been identified by many psychologists as a clip that induces a positive mood. The other half were shown nature scenes from Denali National Park, which psychologists have found induces a neutral state of mind.
“The thing that surprised us was how clean the main result was,” Ifcher says. “We went in with a very specific research question, and there was clear evidence that those who were put in a good mood by the video were consistently more willing to wait for the money.”
Ifcher says there are numerous real-world applications for the findings of the experiment. For example, some companies appear to have already figured out that there is a relationship between being in a good mood and investment decisions, and have devoted considerable effort to creating pleasant offices (he cites Fidelity Investments as an example). Others may follow suit.
He can also envision companies using videos or other stimuli to create an upbeat mood among employees before the employees make a decision on their pension contributions, the idea being that they will wisely agree to make a larger contribution if they’re feeling good.
“The significance of this experiment is potentially very large,” Ifcher says. “Time preference, the ability to have patience or willpower in receiving money, is a really important part of who people are. Some psychologists even believe that the two most important predictors of success in life are intelligence and willpower.”