Financial compensation can distract from emotional suffering

Alice G. Walton | Feb 06, 2018

Say a reckless driver crashed into the property of a 70-year-old woman, causing significant emotional trauma. When seeking compensation, the woman shouldn’t mention that the crash also caused a small amount of financial damage, suggests research by Chicago Booth’s Christopher K. Hsee, Booth PhD candidate Shirley Zhang, and Northwestern’s Xueer Yu.

The researchers tested how much participants in a series of experiments would award a victim in various circumstances, including the reckless-driver scenario. The researchers found that scenarios in which a victim reported no financial damage drew compensation of $1,400, on average. But when the victim reported a small amount of damages, compensation was just $470.

In follow-up experiments, hypothetical victims received the greatest compensation when there was no physical or financial damage, only an emotional loss. Victims who had experienced $1 in financial damages actually received more compensation than those who had experienced $50–$60 in damages. However, victims who had several hundred dollars in damages were compensated more than those with no damage.

Citing a significant amount of financial damages can boost compensation; but, if the amount is small, it’s better not even to bring it up, the researchers conclude. They say that this reflects the “anchor” effect in behavioral economics, in which people pin their judgments about an uncertain quantity to a known quantity, even if disproportionately small.

“It would be better to say ‘I was so scared that I lost two nights’ sleep’ than to say ‘I was so scared that I lost two nights’ sleep and one day’s work,’” the researchers write. “If the victim mentions one day’s work, the mediator would likely compensate the victim for only her one day’s pay. If the victim does not mention one’s day work, the mediator would likely award more, unless the victim has a high-paying job and the judge is aware of it.”

Tort law allows victims to be compensated for purely emotional losses. But it’s important to understand the psychology of how the average person weighs emotional loss compared with financial loss, whether in court or out of court, the researchers write.
“[T]he fact that assessing psychological bias is difficult does not mean we can ignore it, or subsume it in a concurring economic loss,” the researchers conclude. “Emotional loss is real and ubiquitous. We hope this research will draw . . . the attention of the public to the potential neglect of emotional losses, especially in the presence of economic losses.”