Psychologists at Harvard and Columbia Universities established this experimentally. They asked people to choose between a sum of money now and $85 in three months' time. Before making this choice, one group of subjects was shown a film about the Great Barrier Reef which was intended to elicit neutral emotions. The other group was shown the death scene from The Champ, a notoriously maudlin clip which psychologists often use to sadden their subjects. They found that the typical person in the neutral group accepted an average of $56 immediately rather than $85 in three months' time. That's a high enough discount rate, equivalent to around 80 per cent a year. But sad subjects had an even higher discount rate; half of them accepted less than $37. "Sadness increases impatience," the researchers conclude.
They suggest this is because sadness makes us focus more upon ourselves - as anyone who's listened to a woman who's just split up from her boyfriend will know - and this focus biases us to care more about our present self than our future one.
However, it is also consistent with orthodox economics. This says that when out utility is low, our marginal utility should be high. And when this is the case, we will want income and happiness now rather than in the future.
This is no mere laboratory finding. It's consistent with the real world. It helps explain why women use 'retail therapy' when they are feeling down. And it's consistent with the tendency for stock markets to fall after a country's football team loses a big match - because when we feel low we prefer assets we can use now, such as cash, to ones with future payoffs such as equities.
The obvious implication of all this is that we shouldn't take financial decisions, or decisions to buy big-ticket items, when we are feeling sad for any reason. This advice can, however, be harder to follow than it sounds, because bereavement often requires us to reorganise our finances.
However, it might also have implications for stock market behaviour generally. It might help explain the tendency for stock markets to fall too far in the autumn, with the result that Halloween is a great buying signal. As the nights get longer in the autumn, we get a little melancholy and this depresses share prices not just because it makes us pessimistic about the future, but because sadness increases our present bias and so causes us to shun assets with future payoffs. Equally, the better weather in the spring improves our moods and so makes us more future-oriented, which causes shares to rise.
Investing is not just about rational assessments of the future - which is unknowable anyway. It is also about fluctuations in our moods.
