Are we bad forecasters?

Predications of emotional impact weigh heavily on decisions. In fact, people avoid risk even when faced with the prospect of large gain (PDF), predicting loss will hurt them much more than an equal gain will please them. If that is true, this phenomenon (termed loss aversion) is simply a rational product of accurate affective forecasting.  Currently, research seems split on this question.  Studies have indicated that loss induces more intense neural activity, indicating that our forecasting may be valid.  However, behavioral economics generally proposes that we are bad forecasters, and studies show that we consistently overestimate the intensity of emotion from life tragedy.

In a new study, participants effectively minimized impact of loss after a game of luck using various coping mechanisms, such as dissonance reduction, self-affirmation, motivated reasoning, and positive illusions (PDF). Researchers found that “there was no evidence that losing actually had a greater emotional impact than winning,” showing we are indeed poor loss forecasters.

So what of studies reporting more intense neural response to loss?  Those studies could be measuring only very immediate effects before subjects could employ the above coping mechanisms.   However, until further research is done, it seems that the current study should be taken simply to show that, as with other losses, we have effective methods of coping with monetary loss that we do not factor in to our affective forecasts.

Interestingly, participants were far better at assessing levels of positive affect from winning; in one of the two games participant guesses were spot-on, and in the other were very close.

Comments

[Victoria Pynchon]

thanks for this; I was turned on to your blog by a Canadian lawyer who blogged on this topic & on my notes on cognitive biases in negotiation & I blogged back to both him and you. I used to just say "gawd I LOVE the internet"; now I'm a total blog convert & will link mine to yours this weekend. This gives new meaning to interdisciplinary. FAST. Best, Vickie Pynchon

[Stephen M (Ethesis)]

I'd have to say that when I buried my oldest daughter, we consistently overestimate the intensity of emotion from life tragedy was 180 degrees wrong. I greatly underestimated the intensity of emotion and the time it would take to recover -- something that seemed true of most of the people in the local chaper of Compassionate Friends (a grief support group).

Must be that I didn't go on to do graduate work in econ, but went to law school instead that distorted my ability to predict the future that way.

[Stephen M (Ethesis)]

Hmm, trying to use html to mark a quote didn't work.

Too bad, but I'll remember that for future comments.