Behavioral psychologists George Loewenstein and Dan Ariely set up a very interesting experiment in the University of California at Berkeley. They went out to the campus and invited male students to participate in a survey on decision making.
The survey was divided into two parts. At the start, consenting participants were given a brief introduction to the survey methodology. They were told to bring home a laptop computer and to answer the questions only when they are alone. Up till this point in time, the participants had no inkling what the genre of the survey is about.
Participants would then return to the comfort of their rooms, power up the laptop and get down to answering three sets of survey questions. The very first instruction given by the program loaded in the computer would be for participants to imagine that they are sexually aroused and answer the questions as if they were in that state.
Questions about Sex
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The first set of question is about sexual preferences – Would a woman’s shoes be erotic? Would it be fun to tie up partners or be tied up? Another set asked about the likelihood of engaging in immoral and questionable behavior. Would he encourage a woman to drink, or tell a woman he loved her just to increase his chances of having sex with her? And finally, the third set of question is about the likelihood of engaging in unsafe sexual behavior and participants attitude towards the use of protection.
Participants would get through the 3 sets of questions and their answers would automatically be recorded in the computer. Upon returning it to the survey administrators, they would then be offered the chance to participate in an extension to the original survey.
Participants who agreed would be given the same laptops and told to provide answers to the same sets of questions. This time round however, from the very same computer program, they will be provided with sexually arousing images and they are instructed to physically pleasure themselves while answering the questions.
With this innovative set up, Loewenstein and Ariely had wanted to understand the degree of which ‘rational, intelligent people could predict their attitudes will change when they are in an impassioned state’. They were interested in the differences in answers between session 1, where participants were in a ‘cold’ state and session 2, where participants were in a ‘hot’ state.
The results are consistent and clear. The participants responses indicated that they were more likely to engage in odd, immoral and unsafe sexual behaviour when they are actually aroused than when they are not.
This means that participants were not able to predict their own behaviour. They themselves underestimated their capacity for perversion when caught up in the theos of passion.
Hot-Cold Empathy Gap.
In a separate study, Loewenstein termed this phenomenon the Hot-Cold Empathy Gap. People who are not aroused will underestimate the influence of emotional arousal on their preferences and decisions.
The Hot-Cold Empathy Gap is prevalent in our daily lives. Consider new year resolutions. Let’s say our resolution is to eat healthier. We make our resolutions sitting in the relative tranquility of our rooms away from the temptations of the buffet line. We are confident our resolutions will work out this time round, (Why else would we even bother with resolutions if we think otherwise?). After all, how tough can it be to stay away from cream and cakes?
We make the resolution when we are in the ‘cold’ state. In that state it is all so easy to say that we will be able to resist all and any temptation that comes our way. The test will come when we are physically in the buffet line ourselves. The arousal that comes with the dessert spread is something that is impossible to replicate in our minds. The resolution to eat healthy gets drowned out by the strawberry cheese cake and chocolate mousse with pistachio toppings. That is the Hot-Cold Empathy Gap for you.
Hot-Cold Empathy Gap and Investing.
Consider an investor who has done his due diligence on a stock and is confident that the company is sound and undervalued. He comes up with a plan to accumulate. Should the price fall but fundamentals remain unchanged, he will buy more to average down. He has a good profit target and he is confident that he can execute both scenarios without difficulty.
Say, the moment our investor friend buys into the stock, the price starts on a downward spiral. It continues dropping like a rock in tandem with the general market. In a couple of months, despite all the fundamentals being unchanged, the stock is down by half. Panic sets in. He worries for his portfolio. He starts to lose sleep and lose concentration at work. The investor is now in a ‘hot’ state. The carefully calculated game plan to average down goes out of the window and he considers selling out to ease his pain.
On the other hand, it could well be that the moment the investor buys in, the price sky rockets. For no rhyme or reason, in a couple of months the price has more than doubled. It has now become massively over-valued. Again, the investor is in a ‘hot’ state. The profit target, which he has so cold and calculatively worked out is thrown out of the window again as he considers holding on just a little bit longer for that extra gains. After all, with the price being on such a strong uptrend, what can go wrong?
We all know how both scenarios will eventually turn out.
Sexual habits and investor behavior – Do they have more in common than we can imagine?
As human beings, we are unable to predict what we would do when our emotions take over. We think we can remain the rational and thinking fellow we normally are, but as Ariely and Loewenstein has elegantly shown via their Berkeley boys, that is furthest from the case.
Likewise, we think we can make rational decisions when it comes to investing. Are we in actual fact deceiving ourselves just like how the participants did when they answered questions to the first survey?
It is often said that investing success is 20% strategy and 80% psychology. We spend huge amounts of time and money trying to discover money making strategies. Devoting the time spent towards understanding ourselves and working on our psychology will lead to greater investing success.
PS. The research paper is titled The Heat of the Moment: The Effect of Sexual Arousal on Sexual Decision Making. It is available here. The full set of question is published within. If you would like to try them out yourselves, remember to follow the authors’ instructions and do it only when you are alone.