Understanding Individuals' Behavior Under Uncertainty: Strategy Key Driver in Economic Crisis

Understanding Individuals' Behavior Under Uncertainty: Strategy Key Driver in Economic Crisis

Amalia Duțu (University of Pitesti, Romania)
DOI: 10.4018/978-1-7998-1412-2.ch004

Abstract

An economic crisis is an uncertain situation with negative economic evolutions like unemployment, inflation rate increase, freezing or decreasing of the wages, purchasing power decrease, etc. All of these represent economic shocks. The individual well-being is determined by many things like level, secure income, job stability, health, social relationships, and economic household security. In order to understand How and Why people behave in certain patterns in such an uncertain situation, a comprehensive analysis of situational consequences should be considered. All of these dimensions of analysis are correlated in some way and explain the consumers' behavior alteration during turbulent times. History's crises showed surviving companies were those characterized by high-speed reaction, strategic flexibility and a very good understanding of market mood. Thus, this chapter explains the consumer's behavior change in recession conditions and the panic mechanism that shapes people reactions in such conditions.
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Introduction

Starting with 2008, the global economy has entered a period of profound restructuring; the world faced one of the worst economic crises in its history after the Great Depression in 1930. It was 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 unique character of the 2008 crisis was determined 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 the so-called domino and contagious effects.

Still, during the history, many other economic turbulent times were experienced in different countries or regions. Thus, during the time, analysis and researches identified 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, the following aspect was emphasized: “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 the 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 of 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). For instance, the anxiety of losing the job is higher than the anxiety of unemployment situation. Also, it was proved that people are loss averse. The unhappiness feeling is higher if the wage is diminishing with $10 then the happiness feeling in case of wage increasing with $10. So, loss aversion makes consumers more sensitive to the economic negative evolutions.

Looking at different global economic turmoil moments, the transformation mechanism of the financial crisis into an economic one spread worldwide is based on the fact that a certain type of crisis has created the emergence of another type of crisis, the key driver of this emergence being the emotion. The core mechanism of this phenomenon is considered the “economy of fear”. Due to the exposure to uncertainty and economic shocks, the emotional response of consumers to the effects of the financial crisis has determined the decline in their confidence in brands, companies, sectors of activity, and anti-crisis measures taken by governments. In other words, the negative emotional response has determined the appearance of confidence crisis, which is associated with the change in consumption and spending allocation, people considered savings as a proper response to the uncertainty of their existence. Thus, in this context, safe living becomes a higher priority for each and every individual.

Key Terms in this Chapter

Panic Mechanism: Is the frame reflecting the external behavior al factors representing stimuli (risk content exposure), the internal behavior factors reflected by risk perception and risk aversion, the relations established between these factors and how these factors have modeled individual behavior in uncertainty contexts. In this mechanism emotions and feelings play an important role in the relations established between factors.

Uncertainty Associated to Recession: Is 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”.

Economic Shock Exposure: Is 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).

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 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.

Risk Aversion in Recession Context (Uncertainty): Is 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.

Behavior Alteration: Is reflected by the shifts in consumers behavior 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.

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