Lit Review

Katherine Bray ECON 4309 Literature Review Proposal Emotions play a significant role in the decision-making process, as well as individual assessments of risk, value, and judgment. Traditional economic models and expected utility theory do not account for emotional and visceral influences and fail to distinguish these systems from rational deliberation. One area of economics that suffers from this oversight is the valuation of public goods through contingent valuation methods (CVM.) The intention of senior thesis is to review the literature from behavioral economics, neuroeconomics, and psychology to understand how emotional states are artificially induced in laboratory settings. Using this information, I will conduct an experiment in which volunteers are asked to participate in a CVM to identify their willingness to pay to protect a hypothetical environmental good in Boulder. There will be two groups: a control group and a group that has undergone a “treatment.” I will invoke a positive or negative emotional state in the “treatment group” to observe how different emotional states affect people’s valuation and preferences concerning public environmental goods. The second objective of my research is to expose potential weakness of CVM and why it is not an optimal method for benefit-cost analysis.

Katherine Bray ECON 4309 Literature Review Literature Review

Emotional states are induced in laboratory settings with chemical, audio, visual, conditioned, environmental, olfactory, and situational stimuli. These techniques are particularly useful for behavioral economists, psychologists, and neuroscientists who attempt to understand and model judgment, valuation, and assessments formed by individuals. The exclusion of emotion in economic and decision theory has significant consequences; especially for methods seeking to value public goods using direct measures and surveys such as contingent valuation method (CVM.) Considering the impact external stimuli had on emotional state, there are serious repercussions in failing to distinguish emotional systems from deliberation processes, a potential flaw in CVM. Existing literature reveals various ways in which emotional and visceral states are induced or manipulated in laboratory settings; some more effective than others. Emotions are “low-level psychological processes engaged by events that elicit strong stereotyped behavioral responses” (Lieberman, 2006). Emotional states differ from attitudes and other types of states in that they are neural based, rapid, and automatic responses to stimuli that encompass a wide range of positive and negative feelings. Certain areas of the brain are localized and likely associated with various emotions; of these fear is understood and studied the most because it is directly linked to stimulation in the Amygdala1 and can be measured by fMRI, PET, and other brain imaging techniques (Zald, 2003). Clore reviewed hundreds of scholarly articles to verify a direct and crucial role of emotions on choice, judgment, assessment, and risk estimates (Clore, 1992). Other 1

Located in the medial temporal lobe of the brain

Katherine Bray ECON 4309 Literature Review studies focus on how emotions differ from other inputs in decision-making and find that emotions are particularly prevalent when people make “approach-avoid distinctions” (Zajonc, 1998). Loewenstein finds that “when people are confronted with ambiguity their emotions overpower reasoning; specifically in rational, risk-averse, forwardlooking, decision-making” (Loewenstein, 2001). There is a consensus among behavioral economists and psychologists that emotions are a crucial component in behavior and must be accounted for in theories and models. However, it is only possible to include their influence if it is known what stimuli correspond to which emotions and how they are produced. There are several types of stimuli, each with strengths and drawbacks depending on the focus of the research. The most reliable way of inducing a specific emotional state is with chemical stimuli that can be directly observed and measured with brain imaging technology. A study by Kosfeld shows that patients injected with the hormone Oxytocin are more trusting and demonstrate higher degrees of social interaction and cooperation (Kosfeld, 2005). Several other studies use procaine to activate the amygdala in brains of patients and cause feelings of panic and disturbance (Servan-Scheiber, 1998). Although chemicals are effective, there are several drawbacks to this type of stimuli; namely they are invasive, expensive, and cannot be done without participant awareness. Like chemical stimuli, conditioned stimuli are easily observed and verifiable in spawning emotional responses among those conditioned. Countless studies use tones, light, and electric shocks to elicit target responses. Some stimuli are considered to be biological in producing fear in; such as heights, snakes, spiders, water, enclosed spaces, and strangers. Loewenstein studies the effect of these stimuli, along with crude,

Katherine Bray ECON 4309 Literature Review subliminal, and priming doses on animal and human behavior to show they have significant influence (Loewenstein, 1996, 2001). Visual stimuli are used in psychological and economic experiments to induce emotions that seem to have no direct relation to the target judgment by an individual. A study by Lerner uses three video clips to successfully create emotional states in participants. A clip from “Trainspotting” coaxes disgust, “The Champ” produces sadness, and a neutral clip from “National Geographic” is shown to the control group (Lerner, 2004). Many studies use erotic films and sexual imagery to arouse individuals, often leading to feelings of attraction or aggression (Ditto). Lastly, a study by Tidd demonstrates the power of smiling by revealing a strong positive correlation between the frequency of smiling and the amount of tips waitresses make (Tidd, 1978). Pictures of faces are common visual stimuli used to alter mood. A study measuring brain activity shows significant activation in the amygdala when patients are shown happy faces, beautiful faces, faces of loved ones, masked or fearful faces, and faces from racial out-groups (Zald, 2003). This same study reveals amygdala stimulation occurs in response to extremely harsh or happy tones of voice, white noise, adverse sound collages, and pleasant “chill” music. Other studies find no significant correlation between music and art and emotional states (Konecni, Feagin). Some studies rely on participants to create their own emotional states. Phan explains, “tasks inducing emotions often do so by having individuals evoke memories or imagery of personally relevant affectively laden autobiographical life events” (Phan, 2004). For example, self-stimulation is commonly used in experiments studying the effects of sexual arousal on behavior and attitude. In one study participants see sexual

Katherine Bray ECON 4309 Literature Review imagery and masturbate while rating their level of arousal and attitude towards various moral behaviors and judgments (Ariely, 2006). Konecni, Nordgren, and Loewenstein have conducted several studies asking individuals to use mental imagery and recollection to produce emotional states and observe visceral responses and anticipatory emotional changes. A three-minute reflection on a happy or sad events that are personally significant to an individual can be effective in altering their emotional state and changing their perceptions of risk and probability (Konecni). Environmental conditions are extremely powerful in affecting emotional states. Meylan shows that,“positive or negative emotions may arise from windows, natural light, natural colors, plants, moving water, air quality, and time of day” (Meylan, 2007). Williams finds strong correlations between spatial distance and how people rate their enjoyment or distress from watching different genres of media. Individuals also estimate lower calorie levels in food and weaker reports of emotional attachment to family and hometown when distance increases (Williams, “Keeping...”). Other studies reveal that decisions are contingent on the spatial confinement of an environment; specifically how wide or narrow aisles are and the level of crowding (Levav, 2009). Distance above sealevel can also spawn emotions such as fear and anxiety; in one study participants were far more attracted to the surveyor if they were given the survey on a suspension bridge rather than on a low and unthreatening bridge (Dutton, 1974). Another aspect of environment that affects emotional state is temperature. A study conducted by Williams asks participants to hold either a warm or cold item; those holding the warm item made more positive judgments and were more likely to buy a gift for someone other than themselves (Williams, “Experiencing…”). Rind considers “the

Katherine Bray ECON 4309 Literature Review sunshine effect” and shows that stock markets returns are higher and service-workers receive better tips on days when it is sunny; conversely they are lower on cloudy days (Rind, 1996). It is also shown that sunlight penetration induces relaxation, though it is a U-shaped correlation (Boubekri, 1991). “Research attests to the power of olfactory cues. Smell, more so than the other sensory systems, has been found to be evocative of emotional memories” (Ditto, 2006). Some researchers uses odors and adverse smells to create negative emotional states while others use appetitive smells such as popcorn or freshly baked cookies to trigger hunger states and observe changes in behavior that result from the stimuli (Rotton, Zald, Nordgren, Ditto, Loewenstein). In the presence of appetitive olfactory cues, individuals tend to exhibit behavior that is more impulsive and less sensitive to risk. The last way emotional states are successfully induced is with situational stimuli. Anticipation of electric shock, monetary reward, sucrose, glucose, or food while in a hunger state significantly impacts the level of attraction, anxiety, and arousal individuals feel (Loewenstein, Zald). An experiment by De Quervain observes increased satisfaction when individuals administer effective punishment to other people (2004). Several economists study emotions in response to ownership and the endowment effect as well; finding significant differences in action depending on which condition one faces: selling or buying (Fehr, Loewenstein). Lastly, the emotional state of fatigue is commonly induced with tedious memory trials and difficult computer tasks, leading to decreases in motivation and increases in impulse and empathetic behavior (Nordgren, 2007). As important as understanding how stimuli change emotional state, is knowing how emotional states change behavior. Though there are infinite ways this occurs,

Katherine Bray ECON 4309 Literature Review certain behaviors emerge repeatedly throughout the literature. In multiple studies, Slavic and Smith, observe that conditions of uncertainty or lack of control generally lead to estimates that are less optimistic and less risky; in the presence of certainty or control individuals outlook is more optimistic and risk seeking (Slavic, Smith). In regards to the endowment effect, a study by Lerner suggests that participants demonstrate lower selling prices and buying prices when they feel disgust, and higher buying prices when they feel sad (Lerner, 2004). Sexual arousal and its impact on behavior is studied extensively and is seen to effects multiple areas of judgment, including attraction, aggression, and changes in risk sensitivity (Ariely). Fear and anxiety tend to produce feelings of attraction and lower risk tolerability of individuals (Dutton, 1974). Conversely, a study by Nordgren suggests that hunger or appetitive visceral states encourage behavior that is less sensitive to risk and more impulsive in nature (Nordgren, 2007). This same study measures motivation, empathy, compassion, and impulsiveness to show significant changes in these areas when participants are induced with the emotional state of fatigue (Nordgren, 2007). Emotions are complex and difficult to model or explain empirically. However, the implications of emotional state on judgment and behavior is undeniable and should be studied further. Failing to account for this variable in decision-making theory is a fault and must be rectified in order to increase the predictive power of economic models and enhance the reliability of valuation methods such as CVM.

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