Abstract
An economic crisis is an uncertainty situation with negative economic evolutions like unemployment, inflation rate increasing, freezing or decreasing of the wages, purchasing power decrease, investments value reduction, fluctuations in consumer prices, restrictions in accessing loans, and fluctuations in currency exchange rate that represent economic shocks hitting most of the consumers to some extent. During economic turbulent times, consumers are highly exposed to such risks. The present chapter is intended to explain the consumers' behaviour alteration and spending patterns in recession conditions dealing with the panic mechanism that shapes the consumers' behaviour in this particular context, analyzing it from an economic and psychological perspective. The chapter is organized in two complementary parts in an attempt to present a comprehensive picture of consumers' behaviour change in uncertainty conditions. Readers can find answers to the “HOW” question and also to the “WHY” question placed behind consumers' behaviour alterations during recession.
TopIntroduction
Since 2007, the global economy has entered a period of profound restructuring, the world facing one of the worst economic crisis in its history. It is amazing how fast the financial crisis that started in the U.S. turned into an economic global crisis. The rapid expansion of the economic crisis worldwide, confirms the acceleration of the globalization process and the interdependencies existing between national economies at present. The current economic crisis is considered an unprecedented event for the world, its unique character being supported by several aspects, including its severity and global nature. If the confidence crisis that followed the financial crisis played an important role in turning the financial crisis into an economic one, the acceleration of economic globalization and increasing interdependence in economy have contributed significantly to the expansion of global economic crisis by domino and contagion effects.
Throughout the time, analysts and researches indentified different causes for each important economic crisis episode, a common point being the emotion. At the conference “Crisis of Confidence. The Recession and the Economy of Fear” held in 2009, sponsored by the University of Pennsylvania’s Department of Psychiatry and the Psychoanalytic Center, there was emphasized the following aspect: “The emotion not only led America into the present economic crisis but it could also keep it there.” David M. Sachs, training and supervising analyst at Psychoanalytic Center of Philadelphia stated that “the economic crisis is not one of concern but one of confidence.” In this respect, Nobel economist Stiglitz (2008) claimed that the financial crisis emerged from a catastrophic collapse of confidence. At the same time, Ron Anderson (2009) asked some questions in an article posted on his blog: “Have you noticed that in general, people provide only economic explanations to the present crisis? Have you noticed the majority arguments are built on economic and political elements and only on a small scale on psychological ones?.” Generally, recessions lead to unemployment problems, therefore, incomes fall, consumer confidence decreases, and all these lead to a raise in uncertainty about the future (Kay, 2010).
Looking at the present global economic turmoil, the transformation mechanism of the financial crisis in an economic one spread worldwide is based on the fact that a certain type of crisis generated the emergence of another type of crisis, the key driver to this emergence being the emotion. The core mechanism of this phenomenon is considered the “economy of fear.” Due to the exposure to the uncertainty and economic shocks the emotional response of consumers to the effects of the financial crisis determined the decrease of their confidence in brands, companies, sectors of activity, and in the anti-crisis measures taken by governments. In other words, the negative emotional response determined the appearance of confidence crisis which is associated with the alteration of consumption and spending allocation, people considering savings as a proper reaction to the uncertainty of their existence. Fear of the future, unfavorable changes in price elasticity, hard value and cost benefits gain in importance, compressed time preference, financing becomes more important and safety becomes a higher priority. Consumers choose saving their money instead of spending it (Simon, 2009). The fall in consumer spending leads to a decrease in aggregate demand and therefore lower economic growth. The fall in consumer spending leads to a decrease in aggregate demand and therefore, lowers economic growth. This had as a consequence market contractions and their structure alterations, generating the classical overproduction crisis, but also the prologue of the economic crisis. Thus, the new market situation is characterized as the “age of thrift” which has radically changed customer purchase behaviour providing an environment dominated by public skepticism and lack of trust in business and in marketing offers (Piercy et al., 2010). This is supported by the evolution of Consumer Confidence Index (CCI) which, according to Nielsen Global Confidence Index Report 2008 has experienced significant decreases in all national markets in which it was measured, in some national markets taping an absolute record of decrease. In the first half of 2009, CCI continued to decline in 48 of the 50 monitored countries (see Box 1).
Key Terms in this Chapter
Risk Perception in Recession Context (Uncertainty): Represents the personal interpretation that individuals make regarding the exposure of the risks generated by the evolution of national economy. This is a personal assessment of the chances to be exposed to certain risk, the assessment of risk content (effects), the capacity to control the exposure and confidence in these estimations. Thus risk perception varies on a certain scale.
Economic Turbulent Times: Economic downturn periods characterized by volatility, uncertainty and change, structural brakes and shift phases. Changes are fast and directions of economic change are not very clear.
Risk Aversion in Recession Context (Uncertainty): An individual reflection of the way of thinking and feeling regarding the evolution of national economy during downturn, being a chosen response towards uncertainty shaped by emotions: stress, anger, fury, depression etc. Thus, risk aversion varies on a certain scale between two bipolar attributes: liked on a great extent - disliked on a great extent.
Panic Mechanism: The frame reflecting the external behavioural factors representing stimuli (risk content exposure), the internal behaviour factors reflected by risk perception and risk aversion, the relations established between these factors and how these factors have modeled individual behaviour in uncertainty contexts. In this mechanism emotions and feelings play an important role in the relations established between factors.
Economic Shock Exposure: The effective confrontation with the effects of risks generated by the evolution of national economy during recession (unemployment, inflation rate increasing, freezing or decreasing of the wages, purchasing power decrease, investments value reduction etc.) but also the fear regarding the probability of being exposed. For instance, the loss of job security is not so visible like unemployment experience, but is a very stressful experience, sometimes more stressful than the unemployment itself. The individual preoccupied by job stability is exposed to a higher stress because of the anticipation of the outcomes generated by the possible unemployment and thus by the ambiguity of the future. The effects of this exposure are visible on a short term at the emotional level (anxiety, depression, exhaustion, lack of concentration).
Behaviour Alteration: Reflected by the shifts in consumers behaviour during economic turbulent times being associated to some certain directions: consumption decrease, spending decrease and changes in spending allocation, the migration on the demand curve, switching brands, elimination/ postponing of major purchases, brand loyalty decrease, shifts in decision-making process, a higher emphasis on information process, price sensitivity, rationalization of the consumption and expenses, changes in shopping place, shifts in emphasize on different attributes, changing in spending allocation etc.
Uncertainty Associated to Recession: Reflected by the unpredictability of economic evolutions at micro and macro level, lack of visibility regarding this evolutions, and the risks generated by these evolutions with both social and economic consequences on people, affecting the quality of life, the health status of the population and the family financial situation, but also the social relationships and “capital loss.”