Sam Sivarajan has led wealth management teams at several of Canada’s largest financial institutions and holds a doctorate in behavioural finance. He is the author of two bestselling books and can be found at www.samsivarajan.com.
It shocked many when John Tory, mayor of the City of Toronto, admitted recently to an inappropriate affair with a staffer and indicated his intention to resign from office. For a mayor who campaigned on restoring respectability to the mayoral office, and who was known as “no-story Tory” for his first two terms in office, this was quite the development.
It’s easy for critics and supporters alike to shake their head and marvel how someone can make such an error of judgment. However, this is not the first, nor will it be the last, such incident.
Another example is Eliot Spitzer. Mr. Spitzer was a political star who rose to prominence as a dogged attorney-general who battled and won against Wall Street offenders. Based on that celebrity status he became governor of New York. That all ended abruptly when Mr. Spitzer was caught on a federal wiretap arranging for a rendezvous with a high-priced escort. When the public became aware, he apologized for his behaviour and resigned.
Similarly, by the time Pete Rose retired as a major-league baseball player in 1986, he was a 17-time All-Star, had won three World Series, was a three-time batting champion and a two-time Gold Glove winner. Pete Rose was a shoo-in to be elected to the Baseball Hall of Fame. Then evidence emerged that Pete Rose had gambled on baseball games, including ones involving his team. This was strictly against the rules of Major League Baseball. Despite all his achievements, Pete Rose was permanently excluded from the Hall of Fame.
There are many explanations for such public lapses in judgment. Some commentators would suggest that a sense of impunity or entitlement or addiction is at work. In some situations, that may well be the case.
Another answer might be something that neuroscience researchers have termed the “hot-cold empathy gaps.” When they are in a “cold” state – calm and in a neutral environment – people find it difficult to predict how they might behave in a “hot” state – aroused, tempted, or under some powerful influence.
And this hot-cold empathy gap affects all of us, not just politicians or top athletes.
For example, studies have shown that people are likely to buy more than they had planned if they were hungry while grocery shopping. Other research found that when in a “hot” state, people overestimated their likelihood of practising safe sex or abstaining, experimented with drugs while underestimating their likelihood of getting addicted, and recovering alcoholics underestimated the risk in attending Christmas parties where alcohol may be served. In all cases, individuals in a hot emotional state chose a course of action that they had not planned on doing when they were in a “cold” state.
The impact of emotions on our behaviour is significant. For instance, given the choice of buying a seven-ounce ice cream in an overflowing six-ounce cup or the same amount of ice cream in a 10-ounce cup, consumers expected to pay less for the “stingy-looking” second option. Similarly, during the dot-com boom, companies that had changed their name to include a “.com” at the end enjoyed a roughly 75-per-cent share price gain in the 10 days after announcing their name change, despite there being no changes in their business.
More recently, this “hot-cold” empathy gap can be seen with meme stocks that have attracted investors who are afraid of “missing out.” One example is Bed Bath & Beyond; the troubled retailer’s share price almost doubled in a single day before giving back all the gains the next day.
Ultimately, whether as investors or politicians, we are all susceptible to the “hot-cold empathy” gap – allowing time to cool down before acting can pay huge dividends. An excellent piece of advice, attributed to U.S. Bishop T.D. Jakes, is to “never make a permanent decision about a temporary situation.”