IN ONE OF THE INITIAL CHAPTERS OF THIS BOOK I DESCRIBED HOW ANGER can serve as a mechanism for creating credible commitment, enabling us to improve our strategic positions in interactions with others. Aristotle, who was quite aware of the important role that anger plays in our lives, wrote in his book Politics that “anybody can become angry—that is easy, but to be angry with the right person and to the right degree and at the right time and for the right purpose, and in the right way—that is not within everybody’s power and is not easy.” However, although anger is intended to benefit us from an evolutionary perspective, often it also harms us—not only because of the mental suffering that anger can cause, but also because of the implications it can have on our relationships with those toward whom we express our anger. We are often limited in our ability to control our anger in situations in which it does not serve us or even harms us.
Other emotional reactions with evolutionary advantages that have developed in the human race can similarly create social barriers or trip us up when we need to make correct decisions. In some cases, the evolutionary advantage of certain emotions can be overwhelmed by their disadvantages in the modern world. Several thousands of years of further evolutionary development may be required until they disappear entirely.
Blushing provides a very interesting example. Blushing is prompted by a sense of embarrassment, which is definitely a social emotion. When we feel shamed or embarrassed, the last thing we want to do is draw attention to ourselves. If we could, we would instead prefer to become invisible at those moments. And yet it is precisely in those situations that nature has chosen to highlight our presence by making our faces look as if a bright red light is shining on them.
Charles Darwin devoted an entire chapter in his book The Expression of the Emotions in Man and Animals to the subject of blushing. He identified it as one of the unique characteristics of the human species. But researchers specializing in the evolution of human psychology are still divided over the evolutionary source of blushing. Many regard it as a reaction of the sympathetic nervous system in preparation for what is called a “fight or flight” reaction. Pressure-filled and threatening situations stimulate increased blood flow to the head, because body tissue engorged with blood becomes more sensitive than usual, acting as a radar system to warn of impending danger. A side-effect of this is the red facial coloration of a blush.
This explanation is supported by an interesting experiment performed in 2003 in Australia.1 Subjects in the experiment were asked to sing or read aloud a passage while they were viewed in profile—meaning that only one half of the face of each subject was visible to others. The experimenters found that blood flow to the half of the face exposed to the gaze of others was higher than blood flow to the other half. Blushing, in other words, was localized and appeared in the part of the face that was the most exposed to “danger.”
An alternative explanation of the evolutionary advantage of blushing focuses on the reliable signal that the blusher sends out to the social environment, assuring others that the fact that an unacceptable action or a deviation from social norms has occurred is being duly acknowledged by the blusher. This message, which is reliable precisely because blushing is not given to our control and cannot be consciously faked, served the interests of blushers in the past by making social punishment redundant. Recently conducted empirical studies show that individuals who violate social norms and blush as a result are regarded less negatively by others than those who do not react by blushing. Blushing, however, also occurs in other situations, such as when we are the subjects of overflowing praise. In those cases blushing is socially less advantageous than not blushing.
Regret, which has very clear evolutionary advantages, is also an emotional reaction that can have negative effects, sometimes leading us to make suboptimal decisions. If we never felt regret for any of our actions, we would doubtless be quite miserable, doomed to repeat the same mistakes over and over again. Bonnie Ware, a palliative care worker with many years of experience treating terminally ill patients in hospices, wrote a book about the five most common and sharply felt regrets of the dying as they expressed them to her in their final weeks of life.2 Men typically regretted overconcentration on their jobs throughout their lives and the old friendships that they had lost over the years. Women regretted not giving themselves permission to be happy often enough and also spoke of investing too much in pleasing others. Both sexes regretted holding back on expressing their feelings to others.
It would seem that these regrets are almost by definition irrational emotions—because they were expressed by people who knew that they were so close to their deaths that they could not possibly have sufficient time left to change their behaviors significantly. But these sorts of “grand” regrets actually are in most cases (though not on the cusp of death) quite rational emotions. They are usually most keenly felt during life-changing crises that provoke us to conduct major reviews of our lives and the directions they are taking. They can often bring about significant changes in our habits that last long after the crises that sparked them have abated.
The irrational regrets are most often the smaller ones that cause us to take biased decisions before we have learned all the facts and checked our actions rationally. A large number of experiments conducted by economics and finance researchers have shown that we tend to act with the goal of minimizing future regret. One example of behavior that is guided by a desire to reduce regret is the conformism mentioned in the chapter on herd behavior. We tend to adapt our choices to resemble those chosen by most of our acquaintances. If, for example, the majority of our friends have sold all their stocks out of fear that the stock market is about to collapse, we tend to do the same, even if we are getting strong objective indications that the market is going to rise in the near future. We do so because our regret will be less keenly felt if our mistake is shared by all our friends than if we are left all alone in making the wrong decision. For similar reasons, we are often more fearful of making decisions in subjects that we are supposed to know well and less sensitive to risks in areas in which we have no understanding. We strive to avoid, at almost all costs, the first type of regret (associated with a wrong decision on an issue we are supposed to be familiar with) even if undertaking the risk is worthwhile.
Fear of feeling regret sometimes makes us stubbornly stick to an erroneous decision to avoid admitting we made a mistake. For example, we sometimes find it difficult to sell an asset or an investment instrument in which we have lost money because doing so is tantamount to an admission that we made a mistake investing in it in the first place. As long as we continue to hold on to the asset there remains a chance that we will not regret buying it, because its value might still rise. This leads many to hold losing assets long after it has become unreasonable to expect that their worth will ever return to what it was when they bought them.
Georgio Coricelli, a University of Southern California researcher, along with several coathors, conducted a thorough study about a decade ago on brain activity related to feelings of regret.3 In contrast to most other emotions, the brain activity that is registered during feelings of regret is spread out among several parts of the brain, from those related to cognition and analytic thought such as the orbitofrontal cortex and the inner sections of the cortex to parts of the limbic system such as the hypocampus, which regulates emotions and memories. This wide use of so many parts of the brain may be due to the nontrivial learning aspect of regret, beginning with analytic activity intended to measure to what extent regret for our actions is “justified.”
Coricelli and his coauthors discovered that the brain activity that occurs when we try to minimize future regret in our decisions is very similar to brain activity when we experience regret itself. It would appear that when striving to minimize regret, we focus on the negative outcomes that our decision might cause, and it is during this process that we experience future regret.
There are several other types of irrational economic behaviors that are linked to specific brain activities. Many of them are related to dopamine, the “incentive hormone,” and to the absorption rate of that hormone in the brain. Earlier chapters noted that this hormone is involved in the feelings of satisfaction and pleasure we get from success and that it can influence our attitudes toward risk. It incentivizes us toward achievement, which has clear evolutionary advantages. Dopamine is also responsible for several other brain functions; lack of dopamine is related to Parkinson’s disease. Our need for the feelings of satisfaction and pleasure that dopamine gives us can cause us to act in ways that are inimical to our material interests and in some cases can even be the source of mental disturbances. Kleptomania, oniomania (shopping addiction), and ludo-mania (gambling addiction) are well-known psychiatric conditions related to perverse economic behavior. In certain cases the psychiatric treatment given to people suffering from these conditions involves balancing dopamine levels in the brain.
But even under normative behavior dopamine can cause us to make erroneous decisions based on emotions. One of the most prominent of such phenomena can be seen in the behavior of auction participants. In recent years tenders and auctions have proliferated extensively in cyberspace. The amount of money traded in online auctions has correspondingly grown to astounding proportions. In 2000 the New York Times assessed the mobile telephone spectrum auction conducted that year in Britain to be the largest auction ever held in history. That single auction raised more than $34 billion in revenues from the sale of mobile telephone frequencies.
One of the most intensely studied phenomena associated with auctions is known as “the winner’s curse”: in many cases the winner of an auction actually pays more for the item he or she has won than its true worth. This is a phenomenon observed not only in auctions of low-priced items whose participants are amateur bidders; large corporations bidding in major tenders are also prey to the winner’s curse. In the early 1970s many US oil companies collapsed shortly after they won auctions granting them drilling rights in several places in the United States. These corporations had large staffs of geologists and economists assessing the values of the drilling rights for which they were bidding, but it turned out that they had bid prices that were much higher than the true values of the drilling rights on offer, which eventually bankrupted them.
There are two main causes of the winner’s curse, one cognitive and one emotional. Participants in an auction try to assess the value of the item on auction as best as they can. They then submit initial bids that are slightly lower than that assessment. The more competitive the auction environment, the closer bids will be to the assessed value, because the more bidders there are in an auction, the higher the chances that someone else will outbid you.
If there are a very large number of bidders and they have conducted independent value assessments, it is reasonable to suppose that the average assessment will be quite close to the true value of the auctioned item. If that’s the case, then the winner of the auction, who has bid the most money, has made an offer higher than the average bid—meaning that it is probably higher than the true value of the auctioned item. This is the cognitive explanation for the winner’s curse. In other words, the participants fail to take into account the fact that if they submit the winning bid, then they are valuing the auctioned item higher than everyone else, which in turn means that they are likely to be overvaluing it.
One way to avoid cognitively falling prey to the winner’s curse is to write down the price you are willing to bid on a piece of paper that you then stow away in a drawer for twenty-four hours. After twenty-four hours have passed, take it out again and imagine that one of the auction officials who has already seen all the other bids informs you that you have submitted the highest bid. You should now recalibrate your bid based on this information. In most cases, this will lead you to lower your bid, protecting you from the winner’s curse.
But there is also an emotional cause to the winner’s curse in many cases. Participants in auctions often find themselves driven to submit high bids by “auction fever”—an uncontrollable desire to win the auction at any price. A few years ago two students of mine asked me to suggest a research project. My advice was to find Web sites in which the same items were offered for sale in two different ways—by auction versus direct sale at a fixed price—and to compare the prices at which the items were eventually sold. I hypothesized that the auction prices would in many cases be higher than the direct sale prices for the same items, and my hypothesis turned out to be true. The auction participants could have obtained what they had bought by auction at lower prices if they instead had gone to direct sales at the same site, but the competitiveness of the auction environment and the auction fever that accompanies it pushed them to pay much more.
I personally witnessed a very expensive instance of auction fever several years ago when I was involved in the planning stages of the auctioning of the State of Israel’s national gas storage company. Four large private oil and gas corporations competed vigorously and competitively in that auction, with the winning bid totaling $220 million—almost twice the amount that we expected to receive under even the most optimistic estimate supplied to us by assessors prior to the auction.
When I was hired as a consultant to one of the companies participating in the bidding in Israel’s mobile telephone spectrum auction in 2011, I strove to help my client avoid falling into the trap of the winner’s curse. A few hours before the auction began, I advised the company owner to step away from the overexcited tumult raging at corporate headquarters, take a deep breath, and find a quiet and relaxed place in which he could calmly assess the highest possible price he would truly reasonably be willing to pay for the asset he was seeking. I further told him that after arriving at his decision, he should write that amount of money on a piece of paper and insert it into a sealed envelope. The envelope would then in turn be entrusted to one of his closest friends, a senior banker who was present at corporate headquarters that day. Doing so would constitute a commitment to refuse to be tempted into making a bid beyond that predetermined maximal amount.
The company owner, an experienced, brilliant, and talented businessman, was taken aback by my request. He told me not to ask him to do anything he couldn’t commit himself to doing. He agreed to my suggestions only after repeated entreaties from his colleagues that he would take my advice seriously, along with a threat by the banker to leave the premises if my instructions were not carried out.
The computerized auction began at 11 a.m. and continued straight through to 8 p.m.—nine nail-biting hours of nerves. At 7 p.m., with the latest bid price at $135 million, the owner slowly rose from the chair in which he was sitting, stretched out to his full height, and took a long gulp from the cup of coffee in his hand. “My dear friends,” he admitted somewhat shamefacedly, “the truth is that I bid well beyond the highest amount that I wrote down in the envelope.”
He continued to increase the company’s bids over the remaining hour of the auction, down to the wire.
When the dust settled, it turned out that he had won the auction by submitting a bid of almost $200 million—just about twice as much as the absolute maximal amount he had declared the asset was worth on the piece of paper inserted into the envelope prior to the start of the auction. Forty-five days later, his winning bid was retroactively nullified in accordance with the rules of the auction because he was unable to obtain sufficient bank guarantees to support such an exorbitant commitment of money.
Dopamine plays a role in the emotional aspect of the winner’s curse. Several studies have been conducted using fMRI brain imaging to track the brain activities of auction participants.4 These revealed complicated patterns of brain activity involving several different parts of the brain, but one phenomenon in particular stood out as subjects exhibited auction fever. At every stage in which subjects were informed that they had failed to win an auction, subactivity was registered in the striatum area. This area is part of the limbic system and a site at which dopamine is secreted in the body. Prominent auction losses prompted more prominent subactivity in the striatum, which was followed by more aggressive bidding on the part of subjects in the next stage.
There is no method for completely eliminating irrational emotions, but they can be dulled, and their negative effects can be reduced by conscious awareness of their existence and effects. I have stressed throughout this book that the cognitive and emotional systems within us are not entirely separate from each other and that they often work together. What determines whether a particular emotion is working for us or against us is very much tied to the circumstances that generate that emotion. Identifying the effects of emotional reactions is in many cases a task that our cognitive faculties need to undertake. Just as our cognitive system can enhance emotions that are helpful to us, it can rein in those emotions that are inimical to our best interests. The quote by Aristotle that appears in the initial paragraph of this chapter is right on the mark on this issue. Controlling emotions, especially anger, is not easy. It requires analysis, memory, intuition, and skill, but it does pay off.