1

A Research Project
on

Emotions and their Effect on

Investment Decision Making
[Research Methodology]
Shaheed Sukhdev College of Business Studies
University of Delhi

Itulung Kauring
13218
Ridhi Gupta
13238
Rahul Abujam
13222

Acknowledgement
Through this project we have acquired invaluable knowledge about
how to carry out a business research with all the necessary steps
and make a research project report.
For the same, we express our sincere thanks to Maam Amrina
Kausar, who has given us thorough knowledge about research
methodology throughout the semester and guided us throughout
this project.
Lastly, we would like to thank our friends and family for their
invaluable support.

Table of Contents
Executive Summary..............................................................1
Problem definition.................................................................3
Literature review...................................................................5
Hypothesis.............................................................................7
Experimental Protocol.........................................................11
Experiment Design A:.......................................................11
Results...............................................................................13
Conclusion........................................................................15
Experiment Design B........................................................17
Results...............................................................................18
Conclusion........................................................................20
Analysis...............................................................................22
Theoretical Implications......................................................23
Managerial implications......................................................25
Limitations and Future Research Directions.......................28
Conclusion...........................................................................30
Bibliography........................................................................31

Executive Summary
This paper surveys the research on the influence of investor feelings on
investments and also develops a theoretical basis with which to understand
the emerging findings in this area. The theoretical basis is developed with
reference to research in the fields of economic psychology and decision
making. Recent advancements in understanding how feelings affect the
general decision making of individuals, especially under conditions of risk
and uncertainty are covered by the review. The theoretical bases is applied
to analyze the existing research on investor feelings. This research can be
broadly described as investigation whether variations in feelings that are
widely experienced by people influence investor decision making and
consequently lead to predictable patterns in investments. The paper
concludes by leaving a number of directions for future empirical and
theoretical research.
In this research, experiments have been carried out to test the response of
participants under different emotions. Contrary to the popular belief that
feelings are generally bad for decision making, we found that individuals
who experienced more intense feelings achieved higher decision making
performance. Moreover, individuals who were better able to identify and
distinguish among their current feelings achieved higher decision making
performance via their enhanced ability to control the possible biases
induced by those feelings. This study extends previous research on
emotions and decision making in three ways.
First, it provides direct empirical evidence regarding how feelings influence
decision making performance in a high fidelity simulation that
simultaneously captures the aspects of psychological realism and benefits
of experiments.
Second, we examine contrasting perspective in the literature- the potentially

functional and dysfunctional roles of feelings in decision making- in a

single study design.
Finally, this study demonstrates that the degree to which affective feelings
are functional or dysfunctional for decision making varies considerably
between individuals in a predictable way. In this research, we use feelings
as a broad term referring to various affective states including mood, viewed
as a prolonged and diffuse affective state associated with no particular
object and discrete emotions, viewed as intense prototypical affective
experiences directed towards certain objects, such as anger and fear.

Problem definition
Although few would deny that emotions have some influence on judgment
and decision making in financial markets, the market impacts may not be
substantial. With the aim of investigating this, several studies have
empirically attempted to determine effects of mood proxies, that is, factors
that are known or believed to induce positive or negative mood in people.
In some early studies below average returns in equity markets were shown
to correlate with cloudy weather possibly leading to a negative mood,
geomagnetic storms presumably causing depression, the full moon phase of
the lunar cycle associated with depressed mood, and lower temperatures
believed to increase aggressive risk taking that results in above average
returns. Below average returns due to season have also been observed
presumably due to shorter daylight hours. Other studies have attempted to
show negative effects of disruption in sleep patterns dependent on daylight
savings time changes.
Two studies, including several mood proxies related to weather and bio
rhythm replicated some of the previous results. In reviewing these and other
findings, note that mood misattribution is a possible causal mechanism. A
criticism is that only mood proxies have been studied, with little or no
attempt to measure investors moods directly. This leaves such empirical
studies open to critique that claims the reported results are explained by
other factors. Such studies thus concludes that changes in investors moods
associated with seasonal affective disorder directly influence stock market
returns.
Another emotion influence on prices in financial markets is investor
sentiment depending on widespread moods in a society. Social moods are

the outcomes of interpersonal communication and would in general be

adaptive.
Examples include optimism or hope about the future or pessimism about
and fear for the future. In particular investors buying and selling decisions
in asset markets may easily be influenced by such optimism or pessimism,
as suggested by excessive price volatility. Other research has investigated
emotion effects by directly targeting investors responses. In semi
structured interviews of investors found emotion and cognition to be
inextricably linked in the in investors investment decisions.
The question they asked was therefore whether there were more or less
effective strategies of managing emotions. The answer was that in high
performing investors regulated emotions better than low performing
investors, in particular by avoiding being influenced by negative emotions.
It was also found that experience improved efficient emotion regulation.
Another observation was that high performing experienced investors were
less influenced by (eg: weather-related) mood not being relevant for their
decisions.

Literature review
A recent research argues that the emotions and feelings experienced at the
time of making a decision often propel behavior in directions that are
different from that dictated by a weighing of the long term costs and
benefits of disparate actions.
The literature on emotions and decision making points towards two
contrasting perspectives regarding the role of affective experience in
decision making. The first, which we call feeling as bias inducer, suggests
that individuals feelings induce various forms of bias into the decision
making process that skew their decisions in certain ways. In this view,
feelings can be harmful to decision making performance. There are several
ways that affective feelings can bias decision making. First, feelings can
affect the content of information received in the brain during decision
making. Second, feelings can directly color cognitive judgments required
for decision making. Numerous studies have shown that momentary
feelings influence various social judgment. For example, one general effect,
the mood congruence judgment effect, is that people tend to make
judgments that are consistent with their affective states at the time of
judgments. A third body of research suggests that affective feelings can
directly bias individual choices. For example studies have shown that
intense unpleasant feelings often lead people to favor short term
enhancements, focusing on what is best in the moment, regardless of
possibly negative long term consequences.
Other researchers have proposed a feeling-as-decision-facilitator view. That
is, affective feelings can improve decision-making performance by
facilitating and even enabling decision-making processes. Researchers have
identified several ways though which feelings can facilitate decision

making. First, scholars from several disciplines have suggested that

affective reaction is a core driver of conscious attention and allocation of
working memory, both of which are necessary for the extensive cognitive
processes involved in decision making. Second, feelings can facilitate the
decision-making processes involved in selecting and prioritizing choices
relevant to situational requirements.
One of the common dilemmas a decision maker faces is that potentially
infinite factors and options surround every decision, each with conflicting
advantages and disadvantages, making it extremely difficult or even
impossible to make an optimal decision within a given time frame. Pleasant
and unpleasant feelings can help decision makers to resolve this dilemma
by invoking distinguishable frames of mind that in turn enable and facilitate
their selectively attending to and efficiently prioritizing cues in terms of
their relevance to the adaptive requirements in a given situation. Finally,
considerable evidence exists that momentary feelings influence how people
process information during decision making, which in turn promotes
decision-making effectiveness in particular contexts. For example, people
in pleasant affective states tend to categorize stimuli in a broader, more
inclusive, and more flexible fashion which often enhances creativity and
performance on complex tasks. In contrast, people in unpleasant affective
states tend to engage in more effortful, systematic, piecemeal information
processing which leads to effective decision making when decisions require
accurate, unbiased, and realistic judgments or systematic execution of a
structured decision protocol.

Hypothesis
A number of scholars have found that individuals differ in how they
regulate their affective experience and its broader consequences in their
judgments, choices, and behaviors.
Individuals constantly engage in two types of affective information
processing modes in a temporal sequence. One is open, constructive
processing (called substantive processing) in which people process both
affective and non-affective information extensively and in an open-ended
fashion. However, they are generally unaware of their current feeling states
and their possibly bias-inducing influences and thus experience extensive
and direct infusion of their affective feelings into their judgments and
choices (e.g., mood congruence judgment). The other kind of processing
(called motivated processing) is a more controlled, directed informationprocessing strategy in which the bias-inducing effects generally disappear
or are reversed as people become aware of and actively manage their
affective experience. The judgments and choices of individuals high in
affective influence regulation are less likely to be influenced by their
affective feelings during decision making. The feeling-as-bias-inducer
perspective discussed above would suggest that such individuals are likely
to achieve higher performance in most decision-making tasks in which
decision makers accurate and unbiased judgments in given situations are
the primary determinant of decision performance, because their decisions
will be more protected from the possible biases induced by their feelings. In
contrast, individuals low in affective influence regulation may perform
worse than others in decision making, because their current feelings
constantly influence their judgments and choices to greater degrees. These
judgments and choices in turn hinder them from basing decisions on an
accurate mental representation of reality.

Therefore, we hypothesize that affective influence regulation is positively

related to decision-making performance:

Hypothesis 1: Individuals higher, rather than lower, in

affective influence regulation achieve higher decision
making performance.
A number of researchers have suggested that individuals differ in how they
respond to various affective cues in their environments. For example, some
people are more reactive to negative environmental cues than to positive
ones. Some people react with more intense feelings to both pleasant and
unpleasant events in their lives. In this study, we focus on a general
dimension of affective reactivity often called affect intensity or
emotional intensity, defined as the magnitude of affective feelings
experienced during decision making. By definition, individuals with higher
affective reactivity are likely to experience more intense feelings during
decision making. According to the feeling-as-decision-facilitator
perspective, intense feelings experienced during decision making may
facilitate the cognitive processes involved in decision making. Intensity of
feelings (activation), regardless of whether they are pleasant or unpleasant,
may generate a sense of energy or urgency for action that leads people to
devote a greater amount of effort to a given task and that this effect can
occur without their conscious awareness and control. An increase in effort
generated by intense feelings in turn may lead to better decision
performance to the extent that performance is effort-dependent.
Therefore, we hypothesize that affective reactivity may be positively
related to decision-making performance:

Hypothesis 2: Individuals higher, rather than lower, in

affective reactivity during decision making achieve
higher decision making performance.

Although affective influence regulation and affective reactivity are

mutually distinct individual characteristics, they may not influence
decision-making performance in a purely independent fashion if their
underlying processesthe bias-generating effect of feeling and the
intensity of experienced feelingare systematically related to each other
within individuals. At least to the extent that affective intensity is
systematically associated with decision-making biases, affective reactivity
may influence decision-making performance in interaction with affective
influence regulation. More specifically, affective reactivity may more
strongly facilitate decision-making performance for those individuals who
are higher in affective influence regulation, since they can better regulate
any bias-generating effects that arise during decision making. In addition,
since the association is still partial, the interaction effect may not
completely replace the main effects of affective influence regulation and
affective reactivity on decision-making performance.
Thus, we hypothesize a moderating effect of affective influence regulation
on the relationship between affective reactivity and decision-making
performance in addition to the two main effects:

Hypothesis 3: The relationship between affective

reactivity and decision making performance is stronger
for those individuals who are higher, rather than lower,
in affective influence regulation.
From a practical standpoint, a great deal of uncertainty remains regarding
what individuals should do to better regulate the influence of their affective
feelings on decision making, even if scientific evidence supports our
hypothesis that greater affective influence regulation will lead to higher
decision-making performance.

10

Here we propose a way to reduce the uncertainty and, in doing so, we

contradict the popular prescriptions and organizational practices that
encourage people to ignore or suppress their feelings to better regulate their
affective influence. Accordingly, we hypothesize that emotion
differentiation is positively related to affective influence regulation.
Specifically, individuals who are more attentive to and better able to
identify and distinguish among their current affective statesinstead of
ignoring them or viewing them globallyare likely to better regulate the
possibly bias-generating effects of their affective feelings during decision
making. As a result, more emotionally differentiated individuals will
achieve higher decision-making performance via their enhanced ability to
regulate their affective influence on their decisions.
This argument leads us to further hypothesize that affective influence
regulation mediates the relationship between emotion differentiation and
decision-making performance:

Hypothesis 4: Affective influence regulation mediates the

relationship between emotion differentiation and
decision making performance.

11

Experimental Protocol
Experiment Design A:
Multiple groups of people are selected which fit into this category:
Indian residents
Age group: 30-40 years
Currently employed
Middle class tax bracket
Current financial situation: Stable
Absence of unreasonable debt/loan

30% of the selected people are shown various video clips that are funny or
calming. Basically an overall relaxed and happy sensation has to be
instilled in this group. We will represent this group as GROUP A1.
The next 30% of the people are shown videos depicting war brutalities and
murders. Videos showing road rage and domestic violence can also be used.
The motive behind the same is to anger the members of the group. To make
them somewhat unsettled. This group can be represented as GROUP A2.
The remaining 40% of the people act as the control group and have not
been shown any videos. Their emotions have not been stimulated. This
group will be represented by GROUP B. We assume that this group is not
overly happy or angry.

12

Participants

30%

Group A1: Postive vibes 40%

Group A2: Negative vibes

Group B: Control Group

30%

Then, each person is separately asked a question.

The question If given Rs. 10 lakh and only these options, where would
you invest in? (Returns to be claimed after a period of 10 years)
Option A. Gold (medium)
Option B. Stocks (risky)
Option C. Mutual funds (risky)
Option D. Fixed Deposits (safe)
(Only one option can be selected.)

13

Results

130 people were selected to participate in this experiment. They were

divided into Groups A1, A2 and B as follows:
Group A1 39 people
Group A2 39 people
Group B 52 people

The answers selected by Group A1 were as follows:

26 People
7 People
6 People

: Gold
: Stocks
: Fixed Deposits

The answers selected by Group A2 were as follows:

22 People : Mutual Funds
11 People : Stocks
6 People : Gold
The answers selected by Group B were as follows:
30 People: Fixed Deposits
17 People: Gold
5 People: Stocks

14

Result

30

26

22

17

11

Gold

Stocks

Mutual Funds

Fixed Deposits

15

Conclusion
Members of Group A1 were stimulated in such a way that they were
relaxed and happy. A clear majority of the people {26/39 people (66%)}
chose an option that was neither safe nor risky.
Gold is termed as an investment option that has medium risk associated
with it, as compared to the other options of mutual funds, fixed deposits or
stocks.
Most people of GROUP A1 chose an investment option that had medium
risk associated with it. Other choices made belong to the risky and safe
category equally, more or less. Conclusion is that calm and happy people
take calculated investment decisions with moderate levels of risk. They are
neither rash nor risk averse.
Members of Group A2 were stimulated in such a way that they were
unsettled and angry. 22/39 people (56%)} chose an option that was
extremely risky (Mutual funds). 11/39 people (28%) also chose the risky
option of investing in stocks.
Stocks and Mutual Funds are extremely risky investment options as
compared to the other options of fixed deposits and gold.
Most people of GROUP A1 chose an investment option that had high risk
associated with it. Conclusion is that angry and unsettled people take rash
and riskier investment decisions.
Members of Group B were NOT stimulated in any way.
30/52 people (57%)} chose an option that was extremely safe (Fixed
Deposits). 17/52 people (32%) chose the moderately risky option of
investing in Gold.

16

Very few people invested in risky options.

Most people of GROUP B chose an investment option that was either very
safe or moderately risky. Conclusion here is that people with no particularly
elevated levels of emotion take safe investment decisions.

17

Experiment Design B
Multiple groups of people are selected who fit into the following category.

Age group: 25-40 years

Studied mathematics till 12th standard
Middle class tax bracket
Current financial situation: stable
No history of gambling
Absence of unreasonable debt/loan

Participants were given Rs.100 at the beginning of a 10-round gambling

game. At the beginning of each round, the participants were asked if they
wanted to risk Rs.10 on a coin toss. Those that said no kept their money.
Those that agreed to participate earned Rs.25 if they won the coin toss, but
had to give up their Rs.10 if they lost. Everyone then proceeded to the next
round, in which the same steps were repeated.
The participants were divided into 3 groups: A, B and C.
Group A was first told to write down their happiest memories before the
commencement of the game. The purpose of asking them to do this is to put
them in a happy and relaxed state of mind.
Group B on the other hand was told to write down their most negative
experience before the commencement of the game. The purpose of making
them do this is to put them in an agitated and unsettled state of mind.
Group C was not made to do any such thing. They were simply made to
play the game. The purpose of this group is to act as the control group.

18

Results
58 people were selected to participate in this experiment. The following is
the breakup of how they were divided into the 3 groups.
Group A 19 people
Group B 19 people
Group C 20 people
Participants

19

20

19

Group A: Positive Emotions

Group C: Control Group

Group B: Negative Emotions

19

Group A
Participants in group A invested in 84% of the rounds, earning an average
of Rs.127.
Group B
Participants in group B invested in just 58% of the rounds, earning an
average of Rs.105
Group C
Participants in group C behaved in a way similar to participants in group A
with the participants investing in 80% of the rounds earning an average of
Rs.122.

20

Result
122

105
127

Average Earnings

Group A

Group B

Group C

21

Conclusion
From a logical standpoint, the right thing to do while playing such a game
is to invest in every round. With a 50-50 chance of winning, the expected
value of playing each round was Rs.12.5, while the expected value of not
playing was just Rs.10. Keeping this in mind, it is interesting to note the
behavior of the participants in the different groups.
Group A participants were first made to write down their happiest
memories in order to put them in a good mood. The results after playing the
game show that their choices were the most logical as they invested in 84%
of the rounds (the highest among the 3 groups).
Group B participants who were made to write down their most negative
experience showed the least logical behavior as they invested in only 58%
of the rounds. This seems to indicate that being in an unsettled state of mind
made them make choices which were not the most logically consistent. Fear
seems to have played a large role in the risk-avoidance behavior of this
group.
Group C participants who were not made to write down anything and were
in a normal state of mind made decisions which were similar to participants
in group A with investments in 80% rounds.
What was especially interesting was that all the players started out in
roughly the same place: investing Rs.10 rather than withholding it. But over
time, the agitated and unsettled participants grew more cautious, declining
to play almost as often as agreeing to risk Rs.10 on the coin toss. They were
reacting emotionally to the outcome of the previous round. If they lost

22

money, they got scared and had the tendency to fall back and decline to
play further.
Thus, the participants in relaxed and normal emotional states of mind made
decisions which were the most logically consistent. On the other hand,
participants in an agitated or unsettled state of mind made decisions which
were not the best.
This study is especially relevant because of a concept called the "equity
premium puzzle" that has long bemused financial experts. The term refers
to the large number of individuals who prefer to invest in bonds rather than
stocks, even though stocks have historically provided a much higher rate of
return. There is widespread evidence that when the stock market starts to
decline, people shift their retirement savings that is, their long-term, not
short-term, investments from stocks to bonds. Whereas all research
suggests that, even after taking into account fluctuations in the market,
overall people are better off investing in stocks in the long term. Investors
are not behaving in their own best financial interest. Something is going on
that can't be explained logically. Such an illogical phenomenon can be
better understood when viewed in light of the fact that people make
decisions emotionally and that people tend to have a herd mentality in
making such decisions.

23

Analysis
Going contrary to the popular belief that the cooler head prevails, the
results of this study make it evident that feelings and emotions experienced
during decision making can have positive effects on decision-making
performance. In this study, people with hot headsthose who
experienced their feelings with greater intensity during decision making
achieved higher decision-making performance. This result also provides
direct counterevidence to recent finding that feelings can lead to suboptimal
financial decision making in a narrowly defined situation (when the
expected gain is greater than the expected loss). Consistently with another
popular belief, Dont let your emotions run your life, however, we found
that individuals who better kept their feelings from having direct impacts
on their decisions achieved higher decision-making performance.
This result confirms the dominant view in the literature on affect and
decision making that affective experiences produce various biases in
judgments and choices that must be properly regulated to enhance decisionmaking performance. Yet the popular prescription for successful emotion
regulation, Ignore your emotions, appears, in view of our results, not to
be the right answer for effective regulation of feelings and their influence
on decision making. Instead, the results suggest exactly the opposite:
individuals who better understood what was going on with their feelings
during decision making and thus reported them in a more specific and
differentiated fashion were more successful in regulating the feelings
influence on decision making and, as a result, achieved higher investment
returns.

24

Theoretical Implications
Our findings extend previous research on affect and decision making in
three ways. First, this study extends the decision making literature, which
has generally ignored the role of affective feelings or, at best, focused only
on their bias-inducing role. This study suggests that both feelings and the
ways people handle them during decision making have important
consequences for decision-making outcomes. In particular, the results
showed a strong support for an alternative view that feelings and emotions
can enable and facilitate decision-making processes. This area has been
relatively understudied in decision making research.

Second, past studies on affect and decision making have been fragmented
in the sense that they have focused on either the functional role of affective
experience or its dysfunctional role. This study provides integrative
evidence that both the functional and dysfunctional effects of affective
feelings on decision making operate simultaneously within individuals, as
the results showed that affective influence regulation and affective
reactivity independently, but not interactively, influenced decision-making
performance. Our additional finding that affective influence regulation and
affective reactivity were virtually uncorrelated further explains the
underlying reason: experiencing feelings (a functional process) and doing
something with those feelings (a dysfunctional process) may be mutually
independent within an individual. These results offer strong empirical
support for a broader and integrative perspective on individual difference in
affective information processing that provides an important theoretical
basis for moving beyond simplistic views on whether affective feelings are
functional or dysfunctional to decision making. Instead, it helps researchers
to explore and examine how various individual-level characteristics (skills,
traits, and abilities) create differences in how people experience and handle
their affective feelings during decision making, thus ultimately determining
their decision-making performance.

25

Third, this study may also contribute to the literature on emotional

intelligence, ones ability to monitor ones own and others feelings and
emotions, to discriminate among them and to use this information to guide
ones thinking and actions. In spite of the excitement regarding the
heuristic value of emotional intelligence, however, there have been few
rigorous scientific investigations regarding the underlying psychological
components and processes that constitute it. This study provides empirical
evidence that emotion differentiation and affective influence regulation are
two essential process components of emotional intelligence that positively
influence individual performance outcomes.

One additional finding in this study that also has an important theoretical
implication is that people achieved the benefit of successful affective
influence regulation from understanding and differentiating among their
current negative feelings, but not from differentiating among positive
feelings. This result was consistent with the study that negative emotion
differentiation, not positive emotion differentiation, led to greater selfregulation of emotions. One explanation for these results is that the
adaptive pressure to respond to and actively regulate feelings is greater for
negative feelings than for positive feelings. Thus, when people experience
their current negative feelings as qualitatively distinctive, they are more
likely to actively regulate such feelings and their possibly negative
consequences, whereas they can be less responsive to positive feelings,
regardless of whether they experience those positive feelings as fully
differentiated or undifferentiated feeling states.

26

Managerial implications
There are two ways in which the findings of this study challenge the
dominant view in managerial discourse and practice that feelings are
potentially dangerous factors hindering effective decision making and thus
must be suppressed or constrained in organizations.
First, our findings suggest that affective experiences have the potential to
both facilitate and hinder decision making within individuals and to do so
simultaneously. The problem of the dominant view and related managerial
practice is not that they are entirely wrong, but that they are attempts to
minimize the potentially negative effects of peoples feelings together with
all of the potentially positive effects, such as enhanced decision efficiency,
engagement, and creativitythus throwing the baby out with the bath
water.
Second, and also contrary to the dominant view, participants who were
more ignorant about and thus less able to identify their specific feeling
states at the moment of decision making performed worse in this study by
being influenced more by the feelings that they ignored. Instead, better
performers were more attentive to their current feeling states and better able
to describe them clearly during decision making. In particular, the better
performers could better distinguish among their negative feeling states,
where the press for affective regulation is greatest.
Our study informs an alternative approach organizations could take to
feelings. This approach would be to foster managers and employees
experiencing and expressing their moods and emotions to maximize the
positive outcomes of those feelings, and simultaneously help them
minimize the feelings potential negative impacts. This approach is similar
to bounded emotionality but speaks more directly to productivity issues

27

than to employee well-being. More specifically, to foster experiencing and

expressing various feelings and emotions in organizations, managers and
leaders may need to carefully reexamine common beliefs, norms,
languages, and practices that devalue, discourage, and constrain
experiencing and expressing feelings. They should actively remove such
cognitive, normative, and behavioral barriers in their organizations, which
might involve a tremendous amount of reeducation and unlearning. We
hope the findings of this study can be used as legitimate bases for business
leaders and managers initiating such reeducation and unlearning.
However, a more challenging issue is how to minimize the possibly
negative influences of affective feelings, once affective experience and
expression became more encouraged and less constrained in workplaces.
This study suggests one particular way in which managers and employees
can reduce the possibly bias-generating effects of their current affective
states (and thus increase decision-making performance). That is, they might
increase the degree to which they attend to and clearly differentiate among
their current affective states during decision making. This can be achieved
by conducting frequent self-audits of current feelings during decision
makingasking oneself, for instance, How am I feeling right now? and
trying to precisely describe current feelings and understand why they are
being experienced.
Employees and managers might also attempt to increase their general levels
of emotional self-awareness. To do this, they might need to acquire richer
categorical knowledge of different emotional states (e.g., describing diverse
distinctive feeling states), their underlying meanings (e.g., when those
feelings are experienced and what people tend to think and do when they
are experiencing those feelings), and the relationships of the states with
each other (e.g., how feeling nervous is similar to and different from
feeling afraid, sad, excited, calm, and so forth). Managers and
employees could then use such enhanced knowledge in describing their

28

current feelings clearly and in a well-differentiated fashion (e.g., being able

to say I am feeling angry as opposed to I am feeling bad). Our findings
place particular emphasis on developing managers and employees ability
to describe and differentiate negative feelings during decision making. Such
differentiation and expression may require a completely different set of
abilities or skills from those required to differentiate positive feelings
(negative emotion differentiation was uncorrelated with positive emotion
differentiation in this study).

29

Limitations and Future Research

Directions
Additional research is needed to address limitations of this study and to
advance understanding of the role of affective feelings in decision making.
First, this study was based on a correlational research design, which makes
it impossible to determine the precise causal directions among the key
variables. Supplemental studies with experimental designs in which
affective feelings are experimentally induced in participants are needed for
this determination of causality.
Second, we measured three individual characteristics of affective
information processing in this studynamely, affective reactivity, emotion
differentiation, and affective influence regulationby directly computing
scores from participants investment decisions. This is a strength of this
study, since the measurements did not rely on participants perceptions of
their affective characteristics, which have been found to be quite different
from their actual affective characteristics. The flip side of the strength is
that these measures are too domain-specific to effectively capture
participants general affective characteristics and/or may not be reliably
replicated in other studies or research contexts. In addition, calculations
were based on certain untested assumptions (e.g., linearity and equal
variance), which could have compromised our results. Thus, a better
approach future studies could adopt would be to use both the objective
measures and some other subjective measures of similar affective
characteristics, such as the emotional clarity scales.
Third, although feelings are a booster for short-term memory capacity, they
also constitute salient information that takes up short-term memory
capacity. As a result, extremely intense feelings can substantially absorb
and thus directly interfere with an individuals short-term memory capacity
or ability to attend, which might hurt decision-making performance. Thus,

30

the relationship between affective intensity and decision-making

performance may be nonlinear (taking an inverted U-shape), and future
research needs to determine the precise relationship.
Fourth, our focus in this study is the effects of affective experience, which
is consciously accessible and describable, on decision-making performance.
However, affective processes include both conscious and subconscious
processes and the latter may have suppressed or amplified our study results.
Exploring both the conscious and subconscious processes of affective
information processing and its effects on decision-making performance
seems a valuable future research direction.

31

Conclusion
Feelings are an indispensable part of peoples individual and organizational
lives and, more importantly, powerful entities that can both benefit and
harm choices and decisions. Yet the popular approach has predominantly
focused on understanding and minimizing the dysfunctional aspects of
feelings. This study not only suggests that whether they are actually
beneficial or harmful to decisions may largely depend upon how people
experience, treat, and use their feelings during decision making, but also
points to an alternative approach in which both functional and
dysfunctional effects of feelings are equally acknowledged and
simultaneously managed to maximize their positive effects and minimize
their negative effects. We invite more scholarly investigation of this
alternative approach and the ways in which it can be applied to various
individual and organizational practices.

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