In the day job, I advise people to do a crossword before taking important financial decisions, because experiments suggest that a task which increases mental alertness can help people make more far-sighted choices.
I was going to recommend that people watch Countdown instead - but then I (quickly) realized that looking at Rachel Riley can stimulate more than the mind. And such stimuli can worsen financial decision-making. Testosterone leads to increased risk-taking, which can lead to financial crashes. More generally, experimental evidence (pdf) shows that higher levels of excitement can lead to price bubbles and hence crashes.
It is no coincidence that in the spring a young man's fancy lightly turns to thoughts of love and that "sell in May" is a great investment strategy. Better weather - which usually comes in the spring - tends to get us happier and more excited, and this raises share prices to levels which are often unsustainable. When shares rose, my first boss used to say "the market's got the horn." He was more right than he knew.
This is not the only example of how we can be influenced to make poor decisions. Here are two others:
- Researchers have found that creating an upmarket atmosphere in a restaurant - by playing classical music rather than Britney Spears - causes people to spend more. This corroborates Robert Frank's fear, that conspicuous consumption, in also creating a sense of affluence, can cause other people to spend more than they otherwise would.
- Women can be primed to act girly. For example, when they go to a mixed-sex school they are more likely to make low-paying "feminine" career choices and to shy away from competition than if they attend single-sex establishments.
There's a common theme here. Our choices can be influenced by contexts and stimuli in ways of which we are not fully aware. As a result, our preferences might not best serve our interests. And if this is true for investment, spending and career choices, might it not also be true in other realms, such as politics?