I was saddened by a development that I learned about late last night. This morning, it took me a while to shake it off but I still managed to tick off items in my Do To list, albeit at a slower pace.
Sadness wears us down. It was hard to start writing my article today because of it. Then I chanced upon this Harvard study about The Financial Cost of Sadness by Lerner, Li and Weber. The hypothesis is “Sadness increases impatience and creates a myopic focus on obtaining money immediately instead of later.”
This runs contrary to the earlier belief that “sadder is wiser” made famous by English poet Coleridge in the 1850s. Sadness supposedly made individuals more realistic, careful and deliberate.
However, in the Harvard study it was gathered that impatience caused by sadness significantly affected the individual’s intertemporal choice, an economic term that describes how an individual’s current decisions affect what options become available to him in the future. For example, by consuming less today, his consumption levels could increase significantly in the future, and vice versa. The experiments show that sadness causes impatience, which in turn causes financial losses. The participants in the sad group were willing to accept 13% to 34% less money to avoid waiting for three months, even if the sadness had nothing to do with the choices being made.
Knowing about the financial costs related to this myopic misery, we should avoid making big financial decisions during extreme sad moments.
1. Death of a loved one is probably one of the top, if not the number one, cause of extreme sadness. Imagine having to decide what memorial service to give your loved one right when you’re grieving. What do you do with the assets and or financial obligations left behind? Sadness together with fear is a deadly combination to have when making financial and other kinds of decision. One may end up buying the wrong services, insurance policies and other investment instruments. I know someone who ended up buying unnecessary policies because of an untimely demise of a spouse. Inasmuch as it’s good to have protection, make sure that you’re buying the right kind. Better still, make all these decisions ahead of time when you are in a more rational condition.
2. Sadness of being away from each other among OFWs is probably what causes a lot of unnecessary purchases. Their intertemporal choices are adversely affected. Before the OFW leaves, it is best to discuss and agree as a family why you are sacrificing family togetherness. List down the priorities and agree on specific timetable and saving and investing rates.
3. Stock market downturns cause extreme sadness for almost everyone, especially for the unbaptized newbies so oftentimes, they allow panic selling get the better of them.
4. Of course the very famous retail therapy is another demonstration how someone who’s unhappy goes to the mall and exercises her myopic misery. Again, the antidote to that is to pay yourself first! As my oldest son who’s now working puts it, “Just take out from your salary your savings and investments for the month immediately, then have a guilt-free spending with what’s left.”
5. Find fulfillment in your everyday activities. This way you veer away from sadness and artificial happiness. This positive disposition enables you to make sound financial and other decisions.
So the next time you, your kids and other loved ones become sad ask the question, “What is the financial cost of this sadness?”
Cheers to financial happiness!