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

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.