Despite empirical progress, our theoretical understanding of mood instability remains stagnant. The uncertainties surrounding mood instability can be traced back to our reliance on natural language as a means of specifying its theoretical aspects. Here, we address the vagaries of language by developing the first formal theory of mood instability. Our computational theory is grounded on the notion of reference-based evaluation: the process by which humans ascribe value to stimuli based on a comparative frame of reference. Building on existing theories of evaluation, we propose a dynamic framework which we use to simulate various evaluative situations. Our simulations furnish three forms of mood instability: emotional rigidity (gravitating toward particular affective states), emotional transiency (experiencing brief emotions), and emotional reactivity (experiencing strong emotionality). Our mood types clarify previous murky verbal descriptions, delineate traditionally conflated instability types, and offer substantive insights regarding the measurement and development of mood instability.