Economists are interested in understanding and modeling how resources are distributed. Any such distribution is influenced by decisions made by governments, firms, investors or consumers. The role emotions play in coming up with these decisions has been considered only recently by economists - although already Adam Smith in his book on The Theory of Moral Sentiments stressed the influence of the "passions" on behavior. However, for long it was assumed that this influence would only disturb the decision-making process and that the effects of emotions are random noise and thus of no interest to economics. In recent years the upsurge of emotion research in psychology has also lead to a renewed interest in emotions by economists. To give just a few example of this interest:
- When evaluating economic systems, macroeconomics is currently stressing more and more often the importance of happiness. The assumption is that instead of high income or growth, overall life satisfaction of the inhabitants of a country might be a better indicator of a desirable system. Therefore research is trying to uncover when happiness is experienced and under which conditions happiness is sustained.
- Financial markets are a wide and important field for economists. Trading behavior at stock markets is usually assumed to be performed by highly trained and rational people. However recent models of trading behavior take into account that traders not only have cognitive limitations and biases but also that their hopes, fears and feelings influence their decisions. Understanding the influence of emotions might make it possible to better predict the ups and downs of markets.
- Another important field for economists is to understand how labor markets work. It seems possible that workers react to their wage levels by adjusting their effort at work. Ideally effort should be high but wages affordable to the company. In these complex interactions trust in the other party or anger about violations of agreements can influence further interactions. Therefore models for example aiming at fighting unemployment might also have to consider these motivations.
In these and in many other situations emotions influence economics. Economists increasingly include emotions in their models explaining behavior. Meanwhile experimental economists study and measure emotions in economically relevant interactions. A fruitful and wide field of research has opened up on the borderline between economics and psychology.
