Wednesday, May 25, 2016

Emotions, Digital Communications, and Risky Decisions

Brian Uzzi, Bin Liu, and Ramesh Govindan have conducted research on whether digital communications tell us something about our emotional state and the quality of our decision making.  They examined people's electronic communications and tried to understand their emotional condition.   They wanted to know how emotions tied to decision making.  Here is what they found: 

The researchers analyzed all 886,000 trade-related decisions and 1,234,822 IMs from 30 professional day traders over a two-year period. They also tracked each trader’s median daily profit—the best measure of trading performance. IMs were coded for level of emotion, based on the specific words used. For example, “nice,” “gold,” and “hit” were associated with moderate levels of emotion.

The study showed that traders were more likely to use IMs when making trades—meaning they were eager to talk about their risk-related decision—and that the emotion expressed in IMs correlated with profitability. As predicted, traders made the highest-quality decisions at a moderate level of emotional activation.

Excessive emotion is problematic. “If you’re over-activated, your emotional state is drawing cognitive resources away from the analytical brain,” Uzzi says. “You then fail to attend to the right information or your perception of the information becomes distorted.”

But perhaps surprisingly, zero emotion is also not ideal. “We show that unless you reach a certain level of emotionality, you can’t pull the trigger on the trade, and you don’t buy the stock at just the right time,” Uzzi says. The finding goes against conventional wisdom that an emotionless state—the proverbial poker face—is best for decision making in business. As the authors note, even Warren Buffett emphasizes controlling emotion in investing, rather than channeling the right amount of it.

Several points are worthy of emphasis here.  First, people do like to discuss situations with others before making risky choices.  Those discussions reveal something about their emotional state.  Second, removing all emotion from a decision - being "super rational" - is not the answer when it comes to improving the quality of choices we make.  Third, perhaps we can use various tools to monitor the emotional state of people tasked with making very risky decisions.   One tool might be an evaluation of key words used in their digital communications.  

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