Screenshot from Mary Poppins — Ms Poppins with a robin on her finger
Screenshot from Mary Poppins — Ms Poppins with a robin on her finger
(featured image: public domain screenshot)

Compensating emotions

The choices we make reveal that we are sometimes quite content to make material sacrifices for emotional utility, and indeed to accept material compensation for emotional damage. But how far can we go in this?

“A spoonful of sugar helps the medicine go down”, Mary Poppins used to sing (that’s your earworm sorted for today). An instructive song, although perhaps a bit questionable given that it celebrates a substance that has, since the 1964 movie, acquired a certain stigma. Its more enduring lesson is that combining something perceived as positive with something perceived as negative was capable of changing behaviour: refusal to swallow a bitter pill might be overturned if it is first sweetened.

Emotions in standard economics

Similarly, pecuniary compensation may retrospectively sweeten the bitterness of non-material detriment. Most people would never deliberately choose to have a holiday in a hotel that turns out to be next to a building site, or to be wrongly accused of having pilfered money from their employer in return for a tidy sum. But money is still customarily accepted as reparation for such harm, which has a significant emotional component.

A building site near a beach
A building site near a beach
A sea view would have been preferable (image: Astrid Westvang CC BY 2.0)

The key element here is definitely the emotion. The unpleasant sensation of a bitter substance on one’s tongue, the feeling that one could be enjoying time with friends and family, the unromantic view of cranes and concrete mixers from your balcony instead of that of a deep azure sea with scattered sailboats, or the thought that others consider you as a fraudster — that is what we seek to compensate.

We also find this notion of compensation in what is much more a behavioural economics concept: temptation bundling, first described by Katy Milkman at the University of Pennsylvania. Milkman, a behavioural scientist, was researching how activities that are beneficial to us in the long run, but experienced as unpleasant in the moment (you guessed it, it’s exercise) could be made to appear as more appealing, to increase the likelihood we stick to them long enough for them to become a habit. “Bundling” such activities with another, tempting one providing us with instant gratification might help us when willpower alone is not enough. In the research in which the term was coined, the enjoyment of page-turner audiobooks was bundled with the effort of exercise. During the experiment, Milkman and her colleagues found that participants who only had access to the compelling listening material while exercising visited the gym 51% more than the control group. Furthermore, once the experiment was terminated, 61% of participants opted to pay for a one-month temptation-bundling programme. A spoonful of sugar at work!

Hedging future disappointment

For certain disappointing events we can, however, place a bet. Imagine your disappointment if the sports team you support has reached the cup final, but then loses. What if, by betting against your team, you simultaneously win some money — might that make good the emotional loss?

Placing a bet for your team to lose is obviously not going to cause them to win. But you might say you’d happily sacrifice £50 to see your team win, and this suggests that the loss of £50 will be pretty insignificant given your joy in case of a victory. If, on the other hand, your team loses, you realize the gain of your bet, sweetening the bitter pill of defeat. Based on the odds and how much you are willing to give up to see your team win, you could work out the bet that maximizes the material compensation for your emotional misfortune.

Donald Trump and Joe Biden
Donald Trump and Joe Biden
What would it be like to bet for the other guy to win? (image: Emma Kaden CC BY 2.0)

The same idea can work with elections, especially binary elections like referendums or US presidential elections. Coincidentally, two friends, the cognitive economist Leigh Caldwell in the UK and the economist Andreas Tirez in Belgium, have been discussing — independently of each other — the idea of betting on the outcome of the US presidential elections in exactly this fashion. At the time of writing, the average odds are 63.5% for Joe Biden to win the election, and 35.9% for Donald Trump to remain in office. Translating these numbers directly to betting outcomes (fees and other considerations mean they don’t, but the difference is not large, and doesn’t affect this thought experiment) means that if you bet £1 on a candidate to win, you’d collect £1.57 in the case of Biden and £2.77 in the case of Trump.

Depending on how important it is that your preferred candidate wins, you can then decide how much to bet on the victory of the opposing candidate. Or you could proceed in an even more sophisticated way, and bet different amounts on both, if your subjective experience of a win and a loss for your preferred candidate is asymmetrical — i.e., if the despondency in case of a loss is much larger (or smaller) than the joy in case of a victory.

False hope — emotion stands in the way

Across the board, they found that participants were reluctant to hedge the outcome of an event that they felt was relevant to their identity. Most of them preferred to bet in the opposite direction: increase potential gains and losses by betting on their candidate or team to win, rather than to reduce losses by betting for them to lose. In one of the studies, participants were even given the option of a “free”, riskless bet to win $5 if their team lost and, remarkably, nearly half of them rejected this option.

The stronger the preference for a candidate to win the election, the more pronounced the reluctance to hedge turned out to be, mediated by the cost of the negative self-signal people experience when placing a “disloyal” bet. In other words, those of us who would feel the worst when our preferred candidate loses, and who would therefore benefit the most of the compensation of at least making some money in that case, are the least likely to consider placing such a hedging bet.

While we are happy to hedge big material losses (through the premiums we pay for our motor and home insurance), when it comes to emotional losses, we just cannot do it. The negative emotion involved in hedging against what we arguably value most of all — our identity — is just too big. Emotion prevents us from hedging emotions.

The emotional truly, er, trumps the material.

Originally published at http://koenfucius.wordpress.com on October 30, 2020.

Thanks for reading this article — I hope you enjoyed it. Please do share it far and wide — there are handy Twitter and Facebook buttons nearby, and you can click here to share it via LinkedIn, or simply copy and paste this link. See all my other articles featuring observations of human behaviour (I publish one every Friday) here. Thank you!

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Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius

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