A colonist's mood is the total sum of their thoughts and traits effects. It can be checked on the colonist's "Needs" tab through a bar graphic. Colonists have a base mood of 50%, which changes according to difficulty. Each difficulty has the following impacts on colonist mood:
With the offsets, it's reasonably easy to keep people from breaking on the Rough and Intense difficulties, but it's much more difficult to keep colonists from breaking on Extreme (as the baseline mood offset for Extreme is effectively Rough, but with colonists constantly having the 'Feeling Terrible' thought). The difficulty can actually be changed at any time during gameplay.
With a sufficiently high mood, Colonists can sometimes get inspired to work harder, run faster or gain other interesting positive benefits. Mood management is a large part of the game, as a happy colony is a productive colony. An unhappy colony generally doesn't get a whole lot done as colonists in a mental break are too busy digging up corpses, wandering around aimlessly or beating up their loved ones.
There are various ways of increasing mood, which generally fall into two self-explanatory categories: Remove the bad things and add more good things. There are a lot of mood-influencing Thoughts. The key to happiness is, in subjective order of importance:
Avoid bad things
Keep an eye on your colonist's needs tab and see which of their negative thoughts can be alleviated.
A colonist in a clean, beautiful and spacious interior is a happy colonist. Conversely, a colonist in a hideous environment can quickly go berserk. The difference between the best and worst of environments can be as much as 60 mood.
A few hours of mandatory joy time per day on a variety of joy objects will prevent tantrum spirals and will lead to long-lasting mental stability. Spread out the joy time over the day to keep colonists' joy need topped up.
Although most communes share all their possessions, some traits can benefit from certain types of apparel or weaponry. Not wearing tattered apparel is also something pawns can enjoy, so assigning their outfit to have at least 50% durability is an option. Lastly, a very impressive bedroom leads to long-term happiness.
The most cost-effective methods of mood management the player has direct influence over are reducing negative thoughts such as organ-harvesting and observing or butchering corpses, so if mood is a problem maybe it's time to stop. Relatively cheap and effective in both short- and long-term is making sure your colonists have a pleasant, clean and comfortable environment. A comfortable chair at a workstation can provide an up to +10 mood boost for the low cost of some resources, and a good quality bed to sleep in will ensure colonists wake up with a smile. Some art in their surroundings can further push up their mood.
Investing in a large, comfortable and impressive combined recreation and dining room pays off dividends. For a relatively low investment, the entire colony can get a substantial mood boost from simple eating a fine meal at a table and playing some horseshoes. An impressive bedroom only benefits one or two people, but the mood effects are permanent.
Mood is a Stat: How happy or stressed someone is.