Economists and psychologists are both interested in these kinds of “affective forecasting” questions. Put more simply, these questions are about how well people can predict their future emotional states.
They are important because we all make decisions today, with a view of how we think we will feel in the future.
Is life always sunny with you?
A 1998 paper specifically looked at the example of living in California.
The researchers found that although people living in the Midwest United States expected Californians to be more satisfied with their lives, they actually reported the same level of life satisfaction as those on the West Coast.
The Midwesterners were focusing too much on the standout features of living in California (nice climate, diverse culture) without considering the downsides (traffic, pollution).
Happiness is the result of a complex equation (which some say can include a short commute, time with friends and family and good health) – and it involves balancing a range of factors.
If I won the lottery, life would be…
Not only do we forget other people’s lives have complications, but it’s also easy to underestimate how quickly we will adapt if our circumstances change.
If we don’t get that dream house or we get a pay cut, we might think these dramatic changes will have a big and lasting emotional impact.
In fact, a famous 1978 study found that people can adapt quickly if their circumstances change. The researchers compared two groups with very different experiences – one of recent lottery winners and another of people who had recently become paralysed. Incredibly, the day-to-day happiness of both groups was about the same. This can seem surprising because when you imagine being a lottery winner or being paralysed, you likely focus on the most obvious changes rather than ‘boring’ daily events like meeting friends or watching tv which actually make up a lot of a person’s day.
This “focusing illusion” was perhaps best summarised by the Nobel Prize winning psychologist Daniel Kahneman when he said: "Nothing in life is as important as you think it is, while you are thinking about it".
How the footballer Ashley Cole can teach us about emotion
Emotions also can change the way we react in the moment. Behavioural economist George Loewenstein argued in a 2000 paper that emotions and cravings can bias decision-making, often in ways that seem irrational. This idea is familiar to anyone who has ever gone grocery shopping while hungry and ended up spending much more than usual because they were overvaluing their present desires.
You often see this pattern played out in the media among footballers – if a big-name player gets a wage hike, his teammates may demand more out of a sense of fairness (even if they’re already earning huge amounts). Take the English defender Ashley Cole, who wrote that he was “trembling with anger” after being offered £55,000 a week by Arsenal instead of the £60,000 he expected. This is an extreme example but nonetheless fairness and trust are hugely important determinants for economic behaviour and are both inextricably linked with emotion.
They are also some of biggest areas of behavioural economics research over the last 20 years.
Money and emotion are undeniably interlinked.
We’ve seen firstly that emotion can cloud perceptions by causing you to focus on dramatic images at the expense of the everyday details that actually matter more for your everyday wellbeing. As in the case of the lottery winners, their everyday happiness ultimately depended on more mundane things like talking with their friends.
Secondly, be very wary of strong emotions when it comes to financial decision-making. Relatively brief moments of excitement, such as buying a new car or house, can have long-term consequences in terms of your money.