What is Emotional Style?
Emotional Style refers to your individual pattern of emotional responses — how you typically experience, interpret, and express emotions across situations and over time. It’s like your emotional “fingerprint.”
According to neuroscientist Richard J. Davidson, each person has a unique emotional profile. As he puts it, “Just as each person has a unique fingerprint and a unique face, each of us has a unique emotional profile, one that is so much a part of who we are and those who know us well can often predict how we will respond to an emotional challenge.”
Table of Content
Dimensions of Emotional Style
Based on his research, Davidson identified six dimensions of Emotional Style in his classic work The Emotional Life of Your Brain written with Sharon Begley. According to him, Each of the six dimensions has a specific, identifiable neural signature—a good indication that they are real and not merely a theoretical construct.”
The six dimensions of Emotional Style are as follows :
- Resilience Style: People at one end of this dimension recover quickly from adversity whereas people at the other end of this dimension recover very slowly.
- Outlook Style: Does a person have a sunny disposition and look at the brighter side of things or does he tend to be cynical or pessimistic? People at one end of the outlook spectrum may be characterised as Positive types; those at the other, as Negative types.
- Social Intuition Style: Can a person read other people’s body language and vocie tone and figure out whether they want to talk or be alone whether they are stressed or relaxed. Or is a person puzzled by the outward manifestations of other people’s mental and emotional state? Socially intuitive types are at one end of this spectrum; Socially Puzzled types are at the other end.
- Self-Awareness Style: Is a person aware of his own thoughts and feelings and attuned to the messages of his body? Or does he act and react without knowing why he does what he does because his inner self is opaque to his conscious mind? Self-aware people lie at one end of his spectrum; Self-opaque people lie at the other end.
- Sensitivity to Context Style: Does a person follow conventional rules of interaction so that he does not tell his boss the same dirty jokes he shares with his friends or engage in a date at a funeral service? Or is he baffled when someone points out that his behaviour is inappropriate? Tuned in people are at one end of the spectrum of the Sensitivity to Context Style; Tuned out people are at the other end.
- Attention Style: Can a person filter out emotional or other distractions and stay focused? Is he so absorbed in the TV show that he does not notice the whining of his dog? Or do his thoughts flit from what he is doing to the quarrel he had with his colleague in the morning or the anxiety about an upcoming presentation? Focused people are at one end of the Attention spectrum; Unfocused people are at the other end.
Emotions and Investing
Emotions have a bearing on risk tolerance and risk tolerance influences portfolio selection. Investors experience a variety of emotions as they consider alternatives, decide how much risk to take, watch their decisions play out, assess whether the initial strategy needs modification and finally learn how far they have succeeded in achieving their financial objectives.
The emotions experienced by a person with respect to investment may be expressed along an emotional timeline as shown in Figbelow. Investment decisions lie at the left end of the time line and investment goals at the right end. According to psychologist Lola Lopes, investors experience a variety of emotions, positive and negative.
Positive emotions are shown above the time line and negative emotions below the time line. On the positive side, hope becomes anticipation which finally converts into pride. On the negative side, fear turns into anxiety which finally transforms into regret.
Hope and fear have a bearing on how investors evaluate alternatives. Fear induces investors to look at the downside of things, whereas hope causes them to look at the upside. The downside perspective emphasises security; the upside perspective focuses on potential gains. According to Lopes, these two perspectives reside in everyone, as polar opposites. However, they are often not equally matched, as one pole tends to dominate the other. The relative importance of these conflicting emotions determines the tolerance for risk.
The Five Year Rule Wall Street’s conventional wisdom is that you should put money into stocks only when you are more than five years from your goal. What is the logic of this rule ? The “five year rule” is scarcely a mean-variance strategy. It is driven by emotional considerations. Think about a situation where an investor has sufficient resources to achieve a major goal that is less than five years away by investing in safe fixed instruments.
However, the investor allocates a substantial proportion of these resources to equities, only to discover that at the end of five years his equity investment has eroded in value and his goal has moved out of reach.
The dominant emotion in this case would be regret. Hence, the five-year rule seems to be essentially a regret-minimisation rule as historically very rarely have equities delivered a negative return over a five-year holding period.
Fairness, Reciprocity and Trust
While most people accept that fairness is valued in our society, the notion of fairness has been largely overlooked in traditional finance which assumes that economic agents are driven by self-interest. In recent years, however, some researchers have recognised the importance of fairness, reciprocity and trust in the conduct of business transactions. Trust is a prerequisite for an efficiently functioning economy.
The costs of business and personal transactions are significantly reduced if people trust each other and treat each other fairly. Empirical evidence suggests that a large number of people trust and treat others fairly, even when they are not likely to deal with them in future. Tipping servers in restaurants is a commonplace example of fairness and trust. People normally tip the servers, as long as the service is above a threshold level. Although tipping is not required, people often do it out of a sense of fairness.
To understand fairness, reciprocity and trust, psychologists have designed various games or experiments. The important ones are:
Ultimatum Game
The participants in this game are divided equally into two groups put in two different Rooms, A and B. Each participant in Room A is randomly paired with someone in Room B. Neither of them know each other’s identity. Each participant in Room A (proposer) is given ₹21000 and asked to send any portion of that amount to the randomly paired participant (responder) in Room B. Proposers can send any amount – ₹10, ₹100, ₹500, `₹900 or whatever.
The respondent in Room B can choose to accept or reject the amount sent. If the respondent accepts the amount, the division proposed by the participant in Room A is final; if the respondent rejects the amount, neither the proposer nor the respondent receives anything.
This game is called the ultimatum game. According to the traditional economic theory, a self-interested respondent will accept any positive amount—something is better than nothing. Realising this, a prosposer would make the smallest possible offer.
When people play the ultimatum game in experimental settings, on average, proposers send more than the minimum possible offer. Perhaps they realise that respondents will reject offers they perceive to be unfair. Typically half the time respondents reject offers that are less than 20% of the proposer’s endowment.
The results of the ultimatum game appear to be incongruent with pure self- interest in two ways. First, responders reject positive offers, which means that they do not maximise their self-interest. Second, proposers send more than the minimum offer, on average, suggesting that they want to be fair. However, you can argue that proposers behave strategically to retaliation of the respondents.
Dictator Game
To separate the effects of fairness and strategy, another game has been proposed. This game is similar to the ultimatum game except that the divison proposed by the participants in Room A is final. This game is called the dictator game because the participants in Room B have decision to make.
In the ultimatum game, all proposers are concerned with retaliation. In the dictator game roughly two-thirds of the proposers in the dictator game make positive offers, even though there is no oppoutunity for retaliation or reputation building. This may be because people value fairness.
Trust Game
While the dictator game seems to measure altruism, there is another game, called the trust game, that measures trust and reciprocity. It is described as below:
As in the previous games, one-half of the participants are in Room A and the other half in Room B. Each participant (now called investor) in Room A is randomly paired with someone Room B (now called trustee).
The rules of the game change from here on. Participants in both the rooms are given ₹21000 each. Investors in Room A can send any amount from their endowment ( ₹21000) to the trustees in Room B. Each rupee sent to Room B is multiplied three times. For example, if an investor in Room A sends ₹2500 to a randomly assigned trustee in Room B, the amount will be increased to ₹500. The trustee in Room B can decide how much of this to keep and how much of this to send back to Room A.
This game is called the trust game because it measures how much the investors in Room A trust their counterparts (trustees) in Room B. It is also called as the investment game because the participants in Room A are “investing” in participants in Room B.
In theory, the trustees in Room B, as purely self-interested persons, should not return anything. Anticipating such behaviour of trustees in Room B, the investors in Room A should not send anything to trustees.
With no trust, the investor in Room A would not send anything to his trustee in Room B and each participant ends up keeping the endowment amount of ₹21000. So, the total gain is ₹12000. With complete trust, the total gain is ₹24000 (3 × ₹21000 + `₹21000). So, if there is trust, all participants can potentially benefit.
In experiments, investors typically send about half of their endowment to trustees, though there is a wide variation across people. Trustees typically return less than one-half of what they receive, implying that the reciprocity ratio is less than 500 per cent most of the time. In fact, many trustees send less than one-third of what they receive, implying that trust does not pay for inevstors.
Altruism
It represents the disinterested and selfless concern for the well being of other individuals. Adam Smith, father of economics, recognised the importance of markets and behaviour motivated by self-interest. However, he also realised that people aren’t entirely guided by narrow self-interest. They are also concerned about others.
In his book theory of Moral Sentiments, Smith wrote : “How selfish so ever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others and render their happiness necessary for him, though he derives nothing from him, except the pleasure of seeing it.
It is this concern for others that contributes to making the economy more effective and efficient. If you show some concern for the well being of your employees, they’ll be more productive and the size of the economic pie.
When you engage in altruistic behaviour, you feel better. It increases your overall well being. It produces what American economist James Andreoni calls a warm glow effect that than compensates for the opportunity cost of altruistic behaviour.
Emotions and social interactions are linked, as evidenced by research using FMRI (functional magnetic resonance imaging). Much of this research falls under a discipline called social neuroscience, which explores the “social brain,” or the neural circuitry that is activated when people interact with one another.
For example, FMRI technology was employed to examine the cognitive and emotional processes of participants during the ultimatum game. FMRI scans of participants showed that unfair offers triggered activity in the forebrain as well as the limbic system.
The rational thought in the forebrain says “Let me accept this offer as it benefits me financially” the emotion in the limbic system says, “By rejecting this offer, I can get even with the guy, even though it will mean some monetary loss.” Heightened activity was observed in the limbic system of participants who rejected the offer, indicating which part of the brain won the argument.
Cornell economist Robert Frank’s 1987 book Passions within Reason analysed some of the things that people do that are not consistent with economic models of pure self-interest. These include tipping in restaurants when far from home, seeking expensive retaliation and staying loyal to friends and spouses even when better opportunities arise.
According to Frank, these behaviours reflect moral emotions (such as love, vengeance, guilt or shame) and these moral emotions appear to be the products of evolution. As moral spcyhologist Jonathan Haidt puts it, “Evolution seems to have made us ‘strategically irrational’ and at times for our own good, for example, a person who gets angry when cheated and who will pursue vengeance regardless of cost, earns a reputation that discourages would-be-cheaters.”
Why do human beings cooperate ? Why are many people fair, when they don’t have to be ? It seems that evolution has favoured those who were cooperative and fair in exchanges. Groups that are pro-social seem to outperform groups that are not. This may be the reason why we are hardwired” to behave socially.
Conformity
Conformity relates with the behaviour of people in accordance with socially accepted laws and conventions. Psychological studies of conformity suggest that people tend to conform to social pressure real or imaginary. In a classic experiment, researcher Solomon Asch asked students to consider lines in Exhibit below and decide which of the lines A, B or C is identical in length to the first line.
The obvious answer seems to be line C. Is it not? However, if you are in a room with eight other university students who all said it was line A, you may not necessarily plump for C. Asch found that students who participated in the experiment conformed to the wrong majority roughly one-third of the time. Nearly 75 per cent of the students conformed at least once. Psychologists who have replicated Asch’s experiments have found that, in general, conformity changes over time, reflecting social norms and culture.
Group thinking
Groupthinking, wherein the members of a group think alike, is an extreme form of conformity. Groupthinking may dominate a small group which is insulated from outside influence. Groupthinking occurs because a desire for conformity leads to collective confirmation bias, and group members are reluctant to share information or challenge proposals made by others.
