The Psychology of Recession and Implications On Growth

bigstock-Recession-Graphic-4113583-1It is well known that in order to drive economic growth companies need to increase their capacity for creativity and efficiency.
At present, there is a widely held belief that the probability of growth is low, and the UK may even descend into a triple dip recession. This very idea has the effect of promoting narrow, survival-oriented behaviours, and duly raising anxiety levels in the very people we need to inspire to deliver economic growth.

We know that increased stress tends to lower cognitive functioning, especially higher order functions like creativity and decision-making.

So raising fears of further job losses, or having to manage even greater workloads, isn’t going to help achieve increased growth.

We also know that thoughts influence behaviour, and the danger is that our beliefs become a self-fulfilling prophecy (the Pygmalion effect).

This situation can be further worsened by perceptual biases such as ‘selective attention’ (we have all witnessed this when buying a new make of car), our tendency to avoid changing our views as much as we should in light of new information (anchoring bias), and the fact that groups tend to shift decisions to the extreme when compared with decisions taken by individuals (a process known as group polarisation).

As a result, when times are good we are collectively prone to taking greater risks – something all too evident during the financial crisis – and then we tend to be overly cautious when times are seen to be more threatening.

One possible implication of this is that firms doing well, with extra cash piles, fail to invest it – holding back chances of recovery and growth.

How threatening they are therefore depends on our interpretation of the facts.

Our responsibility as business leaders/owners is to maximise the quality of corporate decisions and – whilst it’s recognised that decisions are rarely perfectly rational (or bounded as Herbert Simon would call it) – there is a collective responsibility to make them as rational as possible.

This begins by challenging the view that poor economic times are inevitable over the next few years.

The reality of the position is likely to be somewhere in-between, with plenty of scope for growth in some markets, and challenging times in others.

We can start by confronting conservative behaviours about investments, including those to develop the very skills needed to create the innovations of the future.

We can also aim to be more future oriented in our thinking, change reward systems to focus on creating longer-term value (especially those for senior management), and make sure positive news stories are getting due media exposure – and not just targeted at customers or shareholders.

The wider public will benefit from hearing about growth in sectors of the economy, and this can help influence career decisions – which can in turn plug skill gaps.

Lastly, we must stop using the threat of recession as the reason for organisational changes, when they were actually going to happen anyway.

So, let’s challenge our perceptual biases and irrational beliefs and demonstrate visible leadership both within companies/organisations – and with the public – to create a more realistic and balanced view on the likelihood of achieving economic growth.

Just as thoughts influence behaviour, behaviour influences thoughts. The time for action is now.

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