Happy face, sad face
(credit: David Pacey CC BY)

It’s (almost) all about emotions

Economics sometimes has a reputation of being a cold science, in which humanity has no part to play. But in many of our economic decisions, emotions are the prime influence

In business, economic decisions appear to be devoid of emotions. The upsides and downsides of decisions are almost always exclusively expressed in money. Whether it is building a new plant, expanding a store, training staff or even hiring, firing and promoting — often the overarching aim is to manage scarce resources and maximize long-term return on investment. That this happens within legal and ethical boundaries does not detract from this central principle.

The quid pro quo

When we make a purchase, we sacrifice money, and we expect something in return that gives us more value than the amount paid. That value can be material, because it gives us a better return than cash in the bank (like a bond), because it reduces our exposure to risk (like insurance), or saves us time (like a washing machine). It can be partially immaterial (a boring and a cool T-shirt both cover our modesty, but the cool one has immaterial value) or entirely immaterial (think of experiential goods like a ticket to see the Rolling Stones on their latest final farewell tour).

A young child sitting in front of, and touching a washing machine
A young child sitting in front of, and touching a washing machine
Feel the emotional connection! (image: Henry Burrows CC BY)

The value of speaking

My inner neoclassical economist immediately concluded that, unless these objects really had no appeal to my wife, the right answer would be yes, we’ll have them. We would be materially no worse off, provided the cost of storing them, or of later getting rid of them if we didn’t want them after all, was small enough or negligible. But then it occurred to me, imagine we accepted one of those items and shortly afterwards, we’d bin it. Should we tell my daughter that we did, or not? I could feel conflicting emotions bubbling up. If we kept schtum, we were technically not lying, but also not quite being totally truthful. If we did say to her, “thanks for that bibelot, but we decided to throw it out after all”, she might be offended, and wish she had given it to a local charity shop or even sold it on.

Two old ladies gossiping
Two old ladies gossiping
To gossip or not to gossip — an economic decision? (image: Ekaterina CC BY)

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