Friday, May 11, 2007

Hedonic impacts are more muted than we think

New Scientist last week published an attractive article by Kate Douglas and Dan Jones on how to make good decisions. I liked the whole article but one point stood out for me. As decision-makers we routinely overstate the impact of decision outcomes and life events, both good and bad. If we understand this bias we can make better decisions.

We believe that winning the lottery or making love to a Hollywood star will make us happier than it actually will. Conversely we believe life would be completely unbearable if we were to lose our jobs, lose the use of our legs, our sight and so on. Thus we imagine it might be catastrophic if we choose the wrong career, the wrong restaurant or the wrong model car. No it wouldn’t.

The New Scientist authors quote psychologist Daniel Gilbert* from Harvard:

"The hedonic consequences of most events are less intense and briefer than most
people imagine."

For example, most people are loss-averse. Psychologist Daniel Kahneman describes this as the belief that a loss will hurt more than a corresponding gain will please. He showed, for example, that most people are unwilling to accept a 50:50 bet unless the amount they could win is roughly twice the amount they might lose. So most people would only gamble $5 on the flip of a coin if they could win more than $10. They fear losses.

However a recent paper has shown that while loss aversion affects people's choices, when they did lose they found it much less painful than they had anticipated. Quoting the paper's abstract:

“Loss aversion occurs because people expect losses to have greater hedonic impact than gains of equal magnitude. In two studies, people predicted that losses in a gambling task would have greater hedonic impact than would gains of equal magnitude, but when people actually gambled, losses did not have as much of an emotional impact as they predicted. People overestimated the hedonic impact of losses because they underestimated their tendency to rationalize losses and overestimated their tendency to dwell on losses. The asymmetrical impact of losses and gains was thus more a property of affective forecasts than a property of affective experience.”

The authors put down the lack of impact of a gambling loss to our unsung psychological resilience and our ability to rationalise almost any situation. By failing to account for this we make poor affective forecasts.

If you are so afflicted and therefore a poor affective forecaster and need to take an important decision that bears on your well-being a safer strategy is to try to find someone who has made the same decision or choice, and see how they felt with the consequences rather than look inwards and imagine how a given outcome might make you feel. Whatever the future holds, it will probably hurt or please you less than you imagine. So cool it!

This reduces incentives to always try to play it safe. The worst might never happen and, if it does, you have more psychological resilience to cope that you believe.

*Daniel Gilbert has written a best-seller ‘Stumbling on Happiness’ and has an associated blog.

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