The Hindu Business Line : `Affective' forecasting

Consider this. My friend recently found a stock trading at Rs 100. He placed a limit order at Rs 97.65. His order was not executed as the stock moved to Rs 115. He refused to buy the stock at that price even though the profit potential was good. Studies on "affective forecasting" throw some light on my friend's behaviour. What is affective forecasting?

It refers to forecasting our feelings in the future. Studies have shown that we tend to overestimate our feelings for future events.

Suppose you believe that having Rs 10 crore will give you happiness. You win a lottery and you find that having the desired money does not bring you happiness! This feeling is popularly called as "Wombassa" — What you think you are going to get, and what you don't get, when you get what you want.

One reason we suffer from Wombassa is "focalism." That is, we only think about how that particular event will impact us and not about other events that may happen then to reduce our happiness or cause pain. After your lottery win, some unexpected expenses may occur that may rob you of your happiness.

My friend thought that buying the stock at Rs 115 would make him regret his decision of not buying at Rs 97.65. So, he did not buy the stock. But what if he had got an inheritance from his great-grand aunt just after he bought the stock at Rs 115? Surely, the joy from the inheritance would overwhelm the feeling of regret. Of course, it is very difficult for us to foresee such events. Yet, researchers arefinding out how affective forecasting will lead us to make better decisions.

(The author is based in Toronto, Canada)

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