Final answer:
Expected emotions are anticipatory feelings that influence decisions, often leading to sub-optimal outcomes. Loss aversion explains how anticipated negative emotions from losses impact decision-making more than equivalent gains. Understanding these biases helps explain seemingly irrational behaviors.
Step-by-step explanation:
Expected emotions refer to the feelings that individuals anticipate they will experience in response to certain events or outcomes. These anticipatory emotions play a pivotal role in the decision-making process, often leading to sub-optimal decision-making. An example of this is the concept of loss aversion, where the pain of losing a certain amount of money is felt more intensely than the pleasure of gaining the same amount, as discovered by behavioral economists Daniel Kahneman and Amos Tversky. This can result in risk-averse behavior, particularly evident in the realm of investing, where people might overreact to market losses and underreact to gains. These tendencies can lead us away from the rational, unemotional cost-benefit landscape expected by traditional economists, producing decisions that do not maximize potential benefits or minimize losses.
Thus, despite expecting to feel neutral after losing and gaining equal amounts, people often feel displeasure due to the loss overshadowing the gain, culminating in emotional biases within their choices. These emotions, while part of our human nature, can cloud judgement and incentivize choices that may not align with ideal economic behaviors. Understanding these emotional influences is essential for recognizing why we sometimes make decisions that appear illogical or sub-optimal.