Local News

Recession plays mind games with nation

Posted February 23, 2009 6:09 p.m. EST
Updated March 9, 2009 5:13 p.m. EDT

— Capitalism runs on psychology as much as money, and almost daily doses of bad news about job losses and home foreclosures have battered the nation's psyche into a negative feedback loop, experts say.

The recession has instilled such fear into Americans that even those with jobs and money to spend are cutting back, causing the economy to contract even more.

"Right now, it's just about panic and fear in the market, and this is just feeding on itself," said Dan Ariely, a behavioral economist at Duke University and author of "Predictably Irrational," a book about how we make decisions. "The psychology is going to influence the reality."

Ariely said that even he recently hesitated before splurging to take his first vacation in 10 years.

"It felt bad spending a certain amount of money going on vacation," he said.

Raleigh investment adviser Gerald Townsend said he sees similar behavior in the stock market and among his clients. Fear turns overvalued stocks into undervalued ones and investors panic, he said.

"When it's the fever pitch is when we want to totally abandon things, and history has shown that's a bad time to make a new decision," Townsend said. "Ultimately, if we think the economy's going down, we'll help it go down."

Retiree Beverly Honeycutt said the grim headlines have worried her so much that she watches more closely what her family spends.

"I feel like the future looks a little bleak right now," Honeycutt said. "You can only take so much, and it can be devastating."

Ariely and Townsend said planning is a better road to a solution than panic is. Injecting hope into the nation's economic outlook could result in a different self-fulfilling prophecy, they said.

"We owe it to ourselves to try and understand and figure out what is going on, where we stand and be active in this process of getting out of this trouble," Ariely said.