While the odds of winning the lottery are so slim you might not think it matters, it turns out that these inaccurate emotional predictions happen quite often and can influence important decisions, including those about finances.
The outcome of a decision can undoubtedly sometimes be sub-optimal when we make decisions based on predictions of how the outcomes will make us feel (such as thinking “buying this bigger house will make me really happy for a long time”). These predictions are often wrong in the intensity of feeling we think we will have and the length of time we think it will last.
Return to reality
Known as poor affective forecasting among researchers, behavioural scientists Hsee and Hastie and psychologists Wilson and Gilbert summarise many of the key points.
There are a lot of technical terms related to the issue. The expectation that our response to an event will be more intense and longer lasting than it actually being known as “impact bias”. Studies suggest that the more important we think the event is, the greater the impact bias – the more intense and longer we (incorrectly) think the feeling will last.
The term “focalism” is used to refer to the way we tend to focus on one single event in isolation when thinking about how we will feel in the future, without giving due consideration to the other things that will be affecting life at that point in time.
The example of the lottery win illustrates these points well. Research suggests people think this will change their lives totally forever – but in reality, people adapt and levels of happiness are said to gradually return to close to pre-win levels. And, of course, there are many challenges in life that money cannot solve.
Another example is of buying a house – surely this will make us happy for years to come. In reality, the situation is much more complex, with financial as well as lifestyle implications.
The bad is not so bad...
On the bright side, this forecasting trap happens in reverse as well. So not only are good twists not as life-changing as many expect, bad twists are not as bad either. We are often able to rationalise losses such as performing badly at an important job interview or exam.
The inaccuracy of predictions about how we will feel in the future may be in part to an underestimation of our emotional resilience. It happens so naturally that we are often unaware of it, and so don’t take it into consideration when making predictions about how we will react.
Older and wiser?
Although poor affective forecasting is a general tendency, research published in 2011 suggests that older people may be even more optimistic and even more likely than younger people to make financial decisions based on feelings. Their decisions are at higher risk of being sub-optimal. This is particularly important given the range of complex financial decisions that need to be made later in life, such as managing expenses on a retirement income.
Where we get it right
However people tend to be pretty accurate at predicting whether they will feel positively or negatively in response to an event.
Recent research finds that people are also fairly accurate at predicting the relative scale of the emotional impact. That is, those who predict that they will feel the worst or the best often do have a stronger emotional reaction than others who predict a milder response. If you predict emotional thunderstorms you are likely to experience a heavier “rain” than someone who predicts a light shower.
Put it to use
Knowledge about poor affective forecasting can help when making purchasing decisions.
Studies have found that we can improve the accuracy of our affective forecasting – our predictions about how we will feel in the future – if we think about and describe to ourselves other, peripheral events that will be influencing our lives, rather than focusing exclusively on just one event. In practice, this would mean considering not just the happy feeling of holding the keys to a new car, but also that there is still a work deadline looming and the kids need to be dropped off at swimming lessons.
Buying the newest phone or the bigger apartment is unlikely to provide or sustain the predicted increase in happiness, so it could be more worthwhile to swap material purchases for experiences, suggests findings in a paper titled “If money doesn’t make you happy, the you probably aren’t spending it right”. Whereas we get accustomed to better material goods, experiences are kept in memory.
Alternatively, money saved by not getting the new phone or bigger apartment could be put aside for an emergency, such as unemployment or a broken boiler. Although we may not be as upset by the emergency as we think we will be, a monetary buffer could well ease the pressure of a stressful situation even more.