Neuroeconomics Write Up 5

Chifeng “Sherry” Shen

Neuroeconomics

Prof. Harrison

Write-up 5

Oct 5th 2016

Article Summary

Lerner et al. (2004). Heart strings and purse strings: carryover effects of emotions on economic decisions. Psychological Science. 15: 337-341.

The endowment effect refers to people’s tendency to sell an object they own at a price higher than what other people would normally pay for the object. The appraisal-tendency theory suggests that specific emotions can influence decision-making processes through the appraisal behaviors associated with the emotions. In this study, researchers examined the endowment effect’s impact under the emotions of sadness and disgust and testified to the validity of the appraisal-tendency theory.

        Researchers invited 199 young participants to the 45-min long experiment. Half of them were put into the sell condition and the other half were put into the choice condition. Participants in the sell condition received a box of highlighters and were instructed to sell the highlighters back at a range of prices from $0.5 to $14. Those in the choice condition were shown but not given the highlighters. They were, nonetheless, asked about their preference to either receive the box of highlighters or various cash amounts within a range.

Researchers presented the complete study in two separate experiments in order to avoid participants’ changes in behaviors caused by cues about what would be regarded as appropriate behavior (i.e. demand effects). These experiments were referred to as “Study 1” (titled “imagination research”) and “Study 2” (titled “asset-pricing research”) respectively. In Study 1, all of the participants were presented with 4-minute films which would induce one of the following three emotions: neutral, sadness, or disgust. The sad clip described a boy’s mentor’s death; the disgust clip portrayed a man using a dirty toilet; and the neutral clip is a stereotypical National Geographic clip. In order to elicit their emotional experiences, researchers required participants who watched the sadness or disgust inducing clips to write a response about how they would feel if they were in the same situation in the video. Those in the neutral condition were asked to write about their daily activities.

After the writing procedure, participants entered Study 2. Sell condition participants received a form on which they could choose the prices at which they would be willing to sell the highlighters from $0.5 to $14 with an increment of $0.5. Choice condition participants were given a similar set of choices but were instead asked about at which prices they would be willing to receive the highlighters over cash. This method of asking participants to value the item rather than simply asking them to buy has several advantages: first, with this method, participants would not be limited by the amount of money they owned; second, this method could indicate the highlighters’ value in the buyers’ mind straightforwardly, and thus the results would be directly comparable to that of the sell conditions; third, both sell and choice condition had equivalent choices: receiving or not receiving the cash. Considering these advantages, researchers claimed that the emotions brought on by the movies would only affect their valuation of the highlighters, not the gain or loss of the money. In order to ensure that participants demonstrate their true wiliness to sell/choose, participants were informed that one of these choices would be randomly selected and used as rewards at the end of the experiment.

        Researchers then conducted emotion-manipulation checks, in which participants were asked to report their feelings about the movies through choosing from 27 affective states on a form (of which only 5 were actually related to disgust and sadness). Participants were also asked to guess what were the connections of the two studies and it turned out no one guessed the connections correctly. Thus, there was no demand effect. At the end of the experiment, participants were given the highlighters or one of the cash payments that they indicated among the 28 price choices.

Researchers hypothesized that emotions would have a lasting effect on people’s valuation of an object. Specifically, in this experiment, those who watched movies would have feelings of disgust, sadness or neutral emotions, which according to the hypothesis, would have an impact on the their behaviors. It is worth noting that both sadness and disgust are negative emotions, but they were hypothesized to lead to very different behaviors. Lerner et al. believe that compared to those with neutral emotions, both people in the selling group and the choice group would reduce their selling prices. For those in the selling group, they might want to get rid of the object they own because the disgusting feeling affected their evaluation (an “expel” goal). For those in the choice group, they might avoid taking the object because they feel disgusted about things. The extent of price reduction would be different, though. Those in the selling group would likely depreciate their object more because their closeness to the object would increase their extent of revulsion.

Sadness, unlike disgust, was hypothesized to reduce selling price but increase buying price to the extent of the reversed endowment effect. For a seller who was sad, she might want to get rid of the object to change her situation as soon as possible and thus, she might reduce the selling price. A buyer who would also want to change her situation, however, would use purchasing as a pathway to change, and potentially increase her willingness to pay. The buyer’s choice shows that negative feelings may not always suppress valuation. They may sometimes increase valuation.

Results of the experiments supported all of the hypotheses. Sadness decreased selling prices and increased choice prices, whereas feelings of disgust reduced both choice and selling prices. Specifically, disgust had a stronger effect on selling prices than choice prices. An important finding was that when the participants felt disgust, their selling prices and choice prices were indistinguishable from each other, meaning that they stopped exhibiting the endowment effect. Another interesting finding was that the disgusted and sad participants’ selling prices were equivalently low. This may indicate that the effect of negative emotions on an owner is consistent to a certain extent.

In conclusion, Lerner et al. found that both sadness and disgust emotions induced by prior conditions carried over to economic decisions that are irrelevant to the emotions. Moreover, emotions of the same valence (i.e. both emotions were negative emotions) can lead to opposing effects on these economic decisions. These results have implications in various fields, such as the economic consequences of the 9/11. According to the findings, people might have been encouraged to consume because of the sadness brought on by the attack.