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While the majority of their efforts are influenced by figures and formulas, economists possess a natural inquisitiveness regarding the nuances of human conduct—particularly concerning the dynamics that influence purchasing and sales. Caltech economist Marina Agranov shares this intrigue. In a recent investigation, Agranov aimed to explore how feelings such as guilt and disappointment could sway the choices of buyers and sellers.

In this research, Agranov, Caltech’s Rea A. and Lela G. Axline Professor of Economics, requested participants to take part in a straightforward communication game, in which one side (sellers) holds information that the opposing side (buyers) requires to make informed choices. The study incorporated incentives and costs linked to emotional states to evaluate the significance of emotions in these exchanges.

“We commenced with a traditional communication game,” Agranov clarifies. “One individual knows some data that is vital to the other participant. However, when the latter acts, it will determine the outcomes for both parties. One individual possesses the information while the other manages the action. The only means for the information to transfer between these two individuals is through conversation: ‘I need to relay something to you, after which you’ll interpret my communication and respond accordingly.’

This game has been repeatedly employed in economics, both theoretically and experimentally, as it mirrors the scenario between a seller and buyer: The seller provides details about their merchandise; the buyer assesses the worth of that information and subsequently decides whether or not to procure the item. Clearly, this is essential for the seller since it’s only by persuading the buyer to engage in a purchase that they can achieve a profit. Economists modify the game’s regulations in various manners depending on their research objectives.

Agranov and her collaborators enlisted 179 individuals to partake in the study. Every participant was randomly designated as either a buyer or seller, maintaining that role throughout the game. Sellers were informed whether the goods they intended to sell were high or low quality and then instructed to communicate with buyers in order to secure a successful transaction.

“We requested participants to engage in three games,” Agranov elucidates. “The first is the conventional seller–buyer game where there are tangible rewards for successful exchange between a seller and a buyer. The second introduces emotional factors: Sellers might be informed that they detest deceiving and misleading buyers, and that they would face monetary penalties for doing so, while buyers might learn that disappointment from being led into a disadvantageous purchase imposes an extra cost. The third encompasses both material and emotional rewards and penalties but also incorporates an additional seller to examine how rivalry among sellers impacts trade.”

Participants engaged in numerous interactions across all variations of the game. Sellers were informed they possessed either high-quality or low-quality items and had to choose whether to convey the accurate information regarding the quality of their products to buyers. Buyers needed to decide whether or not to place trust in sellers and agree to an exchange of money for items. If no sale occurred, both buyers and sellers received a minor payout; if a high-quality item was sold, both gained a larger payout. However, if the seller managed to persuade the buyer to acquire low-quality goods, the seller received an even greater payout while the buyer got nothing.

In the variations of the game that incorporated emotional elements, players earned money for successful exchanges, but they were also financially penalized if they experienced emotional costs. Whether sellers and buyers faced penalties for their emotions was predetermined by the persona they were allocated at the game’s start, information unknown to the other player.

Agranov and her team focused on straightforward, intuitive emotions tied to the seller–buyer dynamic. “A seller may be informed that the individual they are playing with in this game dislikes lying in general, and will experience guilt for misleading buyers,” Agranov notes. “Economists define guilt in very specific terms. I will feel guilty if I provide you with information that might mislead you into making a poor decision. If I advise my children to consume broccoli, I won’t feel guilty, since broccoli is indeed beneficial for them. But if I tell them to jump off the roof, and they do, sustaining injuries, then I’ll feel guilt. In this scenario, if sellers deceive potential buyers about the quality of their items, and the buyer falls for it, they will experience guilt.”

Conversely, regarding the buyer, Agranov and her group framed disappointment as a psychological cost. “If the buyer discovers that the seller misled them into making an incorrect choice, they are informed that they will feel disappointed,” Agranov states. “We quantify this disappointment as a financial penalty.”

“The findings reveal that when emotional rewards are integrated into the game without seller competition, meaning sellers and buyers feel accountable for their actions, there is an increase in trade and enhanced welfare for both the sellers and buyers. Everyone gains,” Agranov asserts.

Sadly, this outcome does not persist when competition among sellers is introduced. “The improvement in trading when emotional rewards were included proved to be very delicate. The moment competition was introduced, all the beneficial effects that occurred without competition unraveled. There was decreased welfare for both sellers and buyers,” Agranov clarifies. “In a competitive environment, sellers begin to lie significantly more from the fear of being excluded from interactions with buyers. Conversely, buyers, who could decode messages from sellers effectively in a one-on-one, noncompetitive game, are repeatedly deceived when sellers compete against each other.”

Agranov proposes three reasons why buyers found it harder to assess sellers’ claims in a competitive context. “Firstly, there’s a latent belief that nearly all of us share that competition benefits buyers by maintaining lower prices. Because of this, they tend to be less skeptical of sellers than is warranted. The second reason is that within the types of markets we are simulating, it’s challenging to ascertain the honesty of each seller. They only ascertain the quality of the goods when they decide to buy, so they can’t discover if another seller is dishonest. Lastly, beliefs are generally slow to adapt. Contrary evidence does not readily alter the buyer’s belief that competition will always serve their interests.”

“In summary,” Agranov states, “in the game without competition, emotions influenced outcomes in alignment with economic forces. Enhancing the moral nature of interactions between sellers and buyers by imposing costs for guilt from lying and disappointment from being deceived led to increased trade and improved outcomes. However, competition diminishes the efficacy of emotions. Essentially, competitive forces overpower psychological ones in markets characterized by competition.”

Agranov is enthusiastic about the future directions this research could take. “Very little has been explored in economic literature regarding the influence of emotions in market communications. We are initiating our inquiry here and striving to introduce emotional aspects in a methodical manner,” she articulates.

This study was published in an article titled “Trust Me: Communication and Competition in a Psychological Game,” featured in Journal of the European Economic Association. Coauthors include Agranov, Utteeyo Dasgupta from Fordham University, and Andrew Schotter from New York University.

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