Emotions like envy or greed that can spur overspending can obviously have a negative effect on personal finances. But even feeling happy can tempt us into money errors, boosting the chances of falling prey to natural human biases and thinking traps, which can skew our decision making. This can endanger our finances whether we’re investing, spending, or even saving – especially if we don’t pay attention.
It follows that, when we feel strongly about something, it can pay to take a step back and think things through before reaching for our wallet. Here are just seven emotions to watch out for.
1. Happiness Marketing guru Richard Shotton in his bestselling book The Choice Factory says we’re more likely to absorb advertising messages when happy, as we’re more receptive to information generally. Research by Norbert Schwarz and Herbert Bless suggests that happy people may pay less attention to detail or analysing a situation. They may be more likely to rely on rules of thumb or shortcuts.
Studies indicate that shares tend to rise in value during spells of pleasant weather; this could be because of the typically positive effect of sunshine on mood. This study explains that happy people may rate their chance of profit more highly – and be more inclined to buy shares. If lots of people do this, demand and prices can rise.
2. Sorrow The flip side is that stock market falls have indeed been linked to increased feelings of depression or sadness in the population during the winter months, as in this paper. The depressive feelings correlate with a range of individual symptoms – including higher aversion to risk. Unfortunately, if you’re unhappy you may not be any better off when it comes to making the best money choices.
Sorrow can also cause us to seek comfort – which for some people, might mean treating ourselves a little more often, whether it’s a carton of ice cream or a new suit. But would either item really be on your shopping list otherwise?
One experiment found that people were prepared to pay four times as much for the same item when they felt sad. This can be an active attempt to improve our mood, as this article explains. We can shop both when we feel good (for example, to celebrate something) and when we feel down (to elevate our mood).
3. Fear What about fear? Fear is perfectly natural and we all can feel afraid at times when pushed out of our comfort zone. It can encourage us to avoid risk – which sounds like a good thing. But it can also mean we avoid something which actually has a good chance of turning out well but entails a leap into the unknown.
We might feel afraid, for example, to put our money into one investment or account rather than another, even when the objective risk (for example: over a longer period of time) is reasonable for our current circumstances.
Meanwhile, our fear of loss (or loss aversion) has been well documented by many researchers in the fields of psychology and of behavioural science.
4. Boredom What if you feel like you almost have no emotions at all? It could be because you’re feeling bored with your current circumstances. Boredom is common when there’s insufficient variety or stimulation in our everyday lives. Feeling bored can encourage us to take risks just to liven things up.
But science also tells us that boredom can be an effective spur to creativity, too, so why not indulge your imagination instead? You might find clever ways to reduce your apathy without spending too much money.
5. Guilt Are you buying that new toy for your child because you feel bad for shouting at her last week? Then you can end up feeling guilty for spending the money on an unnecessary item as well.
Families can feel all kinds of guilt about spending, and it's obvious that this strong emotion can have a negative effect on finances (as well as relationships) over time.
One way that might help alleviate potential guilty feelings is to budget out what you can afford to spend – and stick to that budget, no matter what. Spend more time together, rather than money, whenever possible.
6. Envy Our envy of others can encourage us to try to keep up with our peers. Even if we’re not really interested in what they’re doing, we might feel we need to spend to compete with the impression they’re creating socially. This might help us feel better about ourselves – even if only temporarily.
7. Greed Another of the Bible’s “seven deadly sins”, greed can push us to spend more and more to acquire items we don’t really need. This can take relatively innocuous forms – such as in the January sales when the feeling can be exacerbated by the typical framing of the items as a discounted “for a limited time” bargain.
Some of the biggest collapses and frauds on the share market have been blamed, at least in part, on greed. One way of dealing with the desire to acquire, studies suggest, is to refocus on the most important things in life.
A followup article will tell the other side of the story – how your “irrational” emotions can sometimes help you make better financial decisions too.
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