Purse Strings Versus Heart Strings: Do Emotions Affect Economic Behavior?
Melbourne Institute Working Paper No. 16/24
Date: July 2024
Author(s):
Abstract
Do emotions affect economic behavior? We identify two transmission channels of negative emotions to consumption, one predicted by economists and one predicted by psychologists. We use self-reported financial stress and mental distress to identify negative emotions and use current and expected spending to capture consumption behavior. We find that the psychology transmission channel dominates when budget constraints are not binding. As a coping mechanism, consumers increase consumption to regulate the negative emotions caused by stress. Our results are in line with appraisal models of emotions where the perceived cause of the emotion rather than its pleasantness drives behavior.