A psychosocial explanation of economic cycles

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The Journal of Socio-Economics 40 (2011) 652 659Contents lists available at ScienceDirectThe Journal of Socio-Economicsjou rn al h om epa g e: www.elsev ier .comA psychosocial explanation of economic cyclesMiguel Pereira Lopes Social and Political Sciences Institute, Technical University of Lisbon, Rua Almerindo Lessa, 1300-663 Lisboa,a r t i c lArticle history:Received 13 JuReceived in reAccepted 30 MJEL classicatioA12B50D11E50N01O10Keywords:Economic cyclesHuman adaptationOptimismPessimismPerceived controliors imt advae aboir coectatdel odownnomretica1. IntroduIn a recethe chairmaSmiths (17in a longer tranquility.state; in adwas citing psychosociaeconomic eeconomy doTransmiis still to b This rese66127/2009) aence Agency FSuperior. The ments and sugAdministrac o Tel.: +351 E-mail add1 CommencSouth Carolina1053-5357/$ doi:10.1016/j.ctionnt address on the topic of the economics of happiness,n of the US Federal Reserve,1 Ben Bernanke, cited Adam59, p. 119) observation that [T]he mind of every man,or shorter time, returns to its natural and usual state of In prosperity, after a certain time, it falls back to thatversity, after a certain time, it rises up to it. BernankeSmith to stress the importance of understanding thel processes of human adaptation to different social andnvironments, particularly those in which the materiales not seem to perform so well.tted from Smith, right down to our days, this messagee assimilated by economics in order to better under-arch was supported by a post-doctoral fellowship (SFRH/BPD/warded to the author by the Portuguese Governmental National Sci-undac o para a Cincia e a Tecnologia, Ministrio da Cincia e do Ensinoauthor thanks to two anonymous reviewers their insightful com-gestions. The author also acknowledges the support from Centro de e Polticas Pblicas (CAPP) at the Technical University of Lisbon.21 361 94 30; fax: +351 21 361 94 42.ress: mplopes@iscsp.utl.ptement Address entitled The Economics of Happiness, University of, Columbia, South Carolina, May 8, 2010.stand how humans handle the challenges and threats they nd intheir context. It is true that eminent economists, such as Schum-peter and his socio-economic perspective, have enlarged the lens ofanalysis of economic behavior (Swedberg, 1995). However, giventhe advances in psychological research that have occurred overthe last decades, new and more comprehensive models need tobe developed.Some economic approaches have highlighted striking similar-ities between biological and technological/cultural evolutionaryfeatures, claiming that social systems consist of collective humanbehavior with origins in the human biological system (Devezas andCorredine, 2001). These authors stress that regularities in humanbehavior manifest themselves as socioeconomic rhythms and thatthe cyclical nature of social phenomena is ingrained in the humanbiological structure. In the same line, we must acknowledge thatleading authors in the eld of economic psychology, notably Katona(1968), long ago launched the seeds of an adaptive theory of con-sumer behavior.These pioneering works were followed by a surge in psycho-logical research and understanding of core explanatory concepts,such as expectations, optimism, pessimism, and perceived controlover events. I believe the time has come to put all this new knowl-edge into an informative model of how people adapt to changingeconomic conditions and how their consequent behavior, in turn,inuences the development of the economy. see front matter 2011 Elsevier Inc. All rights reserved.socec.2011.05.004 e i n f oly 2010vised form 11 May 2011ay 2011n:a b s t r a c tHow human expectations and behavat least Adam Smith. However, recenled to an improved level of knowledgand pessimistic expectations and theus to understand these adaptive expthese improvements, I develop a moand apply it to explain the ups and is that optimistic expectations of ecoeconomy. I conclude by drawing theoand economic policy-making./ locate /soceco Portugalpact the economy has been of interest to economists sincences in psychological and social psychological research haveut human adaptation processes, as well as about optimisticnsequences on human behavior. These developments allowions and behaviors in a more integrated fashion. Based onf human adaptation under different external circumstancess of economic cycles. A central conclusion from the modelic agents might not always have a positive impact over thel implications, as well as potential consequences for nancial 2011 Elsevier Inc. All rights reserved.M.P. Lopes / The Journal of Socio-Economics 40 (2011) 652 659 653As such, the goal of this paper is to present an integrated andup-to-date model of human adaptation to an economic changingenvironment. To achieve this goal, I rst discuss the major incre-ments in psychological knowledge on key constructs to understandhuman adaptation, such as appraisal and coping (Lazarus, 1991).In addition, I also aim to outline implications for economic the-ory regarding how and why people react to different economicconditions, particularly across different economic and businesscycles.I foresee at least two advantages to be gained from a betterunderstandadaptation texts. First,can be enricple engage they changeresurging imwe have seKahneman standing ththese expecterms of thethe assumping consumpositive optinterest ratecircumstanproblem-soconsumers Understbehaviors uswing) cana macroecoeconomic cin the liteas mental base my retion procesknowledge us about taccordinglyIn the rtional explaand then dories in pssection by tion. I then in the lighdrawing copolicy-mak2. CurrentThe exislong intrigu1935).2 Schrst economterns and hlong-tale ty2 EconomicHowever, givetence and will readers are reanonymous renomic development changes occurring in a range of about 4860years), Kuznets (based on migration and investment in construc-tion occurring in cycles of about 1525 years), Juglars (investmentin machines occurring in cycles of about 711 years), and Kitchins(inventory (De Groot aThe cyclemploymentures of a feach other.is sondrats hap Kitchuijn,he sons alieny wSweelped inn. core ups arene to d manhat teat dilizessideis be thatts (19nges the nismwhile elemwinghesenmenlose diesarchsum assu of cogh herepsyc andsinesny cto beonsuuncti,P]), pecti and, he pesser bspecere fing of the psychosocial processes that underlie humanand behavior in response to different economic con- traditional economic theories about economic cycleshed with a behavioral perspective of why and how peo-in overoptimistic or pessimistic expectations and why their behavior accordingly. This, of course, follows theportance of a behavioral economic perspective thaten over the last decades (Akerlof and Shiller, 2009;and Tversky, 1979; Thaler, 1980). Second, by under-e human adaptive psychosocial processes underlyingtations, economists can best inform policy-makers inir own goals. For instance, policy-makers usually rely ontion that to beget more active consumers (i.e., stimulat-ption) authorities should implement policies to nurtureimistic expectations, such as lowering a central banks (De Grauwe, 2008). But as I shall demonstrate, in someces optimistic expectations might, in fact, lead to lesslving behavior and to higher passivity on the part of(Aspinwall et al., 2005).anding the mechanisms that regulate these adaptivender different circumstances (e.g., upswing or down- thus help us to better intervene in the economy atnomic level. Psychologically informed explanations ofycles and nancial crisis have already been advancedrature (e.g., Schwartz, 2010), including topics suchbiases, envy, and illusions. In this case, however, Isearch on the specic literature of human adapta-ses and I hope to contribute toward enlarging ourof how psycho-socio-economic mechanisms can informhese phenomena and how we can inuence them.emainder of this paper, I review the major tradi-nations for economic cycles that have been proposediscuss the state-of-the-art on human adaptation the-ychological and psychosocial research, ending thatpresenting an integrated model of human adapta-discuss a psychosocial explanation of economic cyclest of the proposed model and nish the paper bynclusions and implications for economic theory anding. explanations for economic cyclestence of recurring patterns of economic activity hased economic scholars (Kleinknecht, 1986; Kondratiev,umpeter (1939) was perhaps the most notable of theists fascinated in teasing out the causes of these pat-e showed particular interest in integrating differentpes of waves, namely Kondratievs (structural eco- Cycle and Business Cycle are disputed empirical phenomena.n the core of this theoretical paper, we will assume their factual exis-not make that discussion here. For further knowledge about this topic,ferred to e.g., Hartley et al. (1998) and Grandmont (1985). I thank anviewer for noticing the need to make this explicit.cycles of 1 KoKuzneeach 2(Van DIn tpulsatimost seconom1983; him, hof howgrowthThenomicentrepabilityis, likegests tany grdestabConaction meansKuznecal cha(. . .) inmechashow crucialdownsstand tenviroA cing stuof reseon conals andtheoryAlthouthese wmajor tationsthe buIn aseem from care a f(R = f[Eand exstimulSecondmistic/consumHe not a minvestment cycles occurring in turns of about 35 years)nd Franses, 2008).ical behavior of economic variables such as GDP growth,t, or interest rates is such that it resembles the fea-ractal with the different types of cycles nested within As some have noted, the relationships between these tight that one can even establish the direct functionstiev-type of wave happening for each 3 Kuznets, eachpening for each 2 Juglars, and each Juglar happening forins (or 1 Konratiev = 3 Kuznets = 6 Juglars = 12 Kitchins) 1983).ame vein, Schumpeter also viewed business cycles asof the rate of economic evolution (Kuznets, 1940). Hist explanation for the different pulsation rates of theas the innovation process (Rosenberg and Frischtak,dberg, 1995; Schumpeter, 1939), which according to to explain the long cycles through the understandingovation brings both cyclical instability and economic explanation of Schumpeter for the existence of eco-nd downs lies in the discontinuity of the distribution ofurial ability. As Kuznets (1940, p. 259) asserted, Thisare, to initiate, to overcome obstacles to innovationsy other abilities, distributed along a curve which sug-here are few individuals endowed with such ability toegree, and it is the activity of these entrepreneurs that and promotes instability in the economic system.ring that the innovation process and the entrepreneurshind the occurrence of economic and business cycles human behavior is at the roots of economic behavior. As40, p. 266) puts it, for whatever quantities reect cycli-, these changes result from discrete acts by individualssocial system. If true, understanding the psychologicals behind the different behaviors that humans actually they try to adapt to different economic stages is aent of the explanation for economic upswings ands. However, despite the importance to better under- human adaptation processes to an economic changingt, there is scant literature on this topic.research area to which one can refer are the pioneer- of Katona (1968), which launched the basis of a line evidencing the inuence of the consumer sentimenter expenditure and buying patterns. Katonas propos-mptions are considered the rst main explicit adaptivensumer behavior using socio-psychological principles.e did not directly address the issue of economic cycles, always related to his work because, as he asserted, thehological variables used in his research, such as expec- attitudes, are believed to be related to uctuations ins cycle (Katona, 1957, p. 120).ase, Katona (1968) foresaw the critical variables that necessary in explaining economic variation derivedmer behavior. First, he stressed that human responseson both of changes in the environment and the personwhich led him to acknowledge that motives, attitudes,ations are intervening variables that mediate between responses, and are acquired through past experience.veried that human wants are not static and that opti-imistic expectations play a critical role in explainingehavior.ically found that expenditures and consumption areunction of the ability to buy (i.e., income) but also of the654 M.P. Lopes / The Journal of Socio-Economics 40 (2011) 652 659willingness to buy (i.e., the consumer sentiment) and that expectedincome trends have a greater effect on buying plans than pasttrends, particularly concerning discretionary expenditures such ascars, housing, leisure-time, and so on (Katona, 1971). Using an indexof consumeing future iof pessimisrated, consudeveloped 6Althoughcycles, KatoBut one muple facets ahe clearly done hand, a1979), he alone feels thexperiencesies how heexplanationas uncertaintion is pessifrom consi(Katona, 19asserts thatbut also thaAs explainetance. On thof when opthe heart ofchanges.For all thhuman adachological rhuman adamentary ex3. PsychosAlthoughenvironmencan be traceGreece, theimportancethe last cenThis doeconcerned wfrom other with humaeld of psycidentity devHowever, soexperimentreliable andhave attracnumber of iOne of thuman adaLazarus, 199built on theuniversal thin top journLazarus andwork on theof the concestream of re3.1. Current state of human adaptation theoriesAs briey introduced above, current psychosocial theories ofhuman adaptation stand mainly at the core of earlier theories. Someosts anptati engsignive a serieimizors aan a cogcur aextes wedivider ans a thent te thesituas of aed searyof a s to t resolkmthe psoursals that993)chosthat s, des981;terme reser stary remThis he simorepayinr, as wolkm, on ate t. Thisors sof thSche the ary cim, h corejud acm-soa prr sentiment (i.e., consumer optimistic outlook regard-ncome), Katona (1974, 1979) found that when a wavetic expectation and feeling arose and attitudes deterio-mer discretionary spending decreased and a recession9 months later. not specically developed to understand economicnas work is of extreme help to that important task.st acknowledge that Katonas work has itself multi-nd raises ambiguous conclusions. For instance, whileistinguishes between optimism and condence on thend pessimism and uncertainty on the other (Katona,so considers that it is not how optimistic or pessimisticat matters, but mostly the change in attitude one (Katona, 1971, p. 125). In other writings, he also clar- believes uncertainty and lack of condence arise. His is that people as a whole start to view their future when a substantial proportion and a similar propor-mistic (Katona, 1979). This, of course, is very differentdering pessimism and uncertainty as always related79). Still in another passage, Katona (1979, p. 122) growing optimism dispels uncertainty (say, in 1965)t growing pessimism dispels uncertainty (say, in 1974).d below, these are not simple nuances without impor-e contrary, as I will explain, clarifying these distinctionstimistic or pessimistic beliefs become productive is at an accurate theory of human adaptation to economicis, I turn now to discussing the roots of an integrativeptation based on the most recent ndings of social psy-esearch. Later I discuss how this psychosocial model ofptation can help us to draw an adequate and comple-planation of economic cycles.ocial approaches to human adaptation the interest in understanding how people react to theirt and the perceived threats and opportunities thereind back to at least the principal philosophers of ancient topic of human adaptation has gained an increased in social psychological literature in the second half oftury (Scherer, 1999).s not mean that social psychologists were the only onesith human adaptation issues. It is certain that scholarssciences have long focused on the problems associatedn adaptation processes, such as Sigmund Freud in thehoanalysis (Freud, 1937) or Erik Erikson in the area ofelopment through the human life cycle (Erikson, 1974).cial psychologists have long based their approaches onal and clearly scientic-based methods, thus bringing a signicant set of validated concepts and theories thatted the interest of many researchers and boosted thenvestigations on the topic of adaptation.he most acknowledged psychosocial perspectives onptation is that of appraisal and coping theories (e.g.,4, 1991, 1966). Scholars investigating these issues have emergent concepts of appraisal and coping to develop aeory of human adaptation. These works have appearedals in psychology (Folkman and Lazarus, 1985, 1988; Smith, 1988), and have inspired much of the recent issue of human adaptation. For this reason, I base muchptual analysis that follows on the core concepts of thissearch.of the m(Lazaruof adaquicklyto its cognitiwith aor minbehavi(FolkmThecan ocof the to onelead in(Skinnation athe extoutsidof the processo-callPrimcance relateson theand Fowhich and reappraiexceedet al., 1Psyforms uationet al., 1gies is by somthe othing.Primgoal ofation. solve tbeing skills, partnelem (Fcopingeliminuationbehavidenial ow (changesecondand SwBotsome psive anprobleing as fundamental concepts are those of appraisal and copingd Folkman, 1984). According to psychosocial theorieson, when in contact with a new event, human beingsage in a process of categorizing that event with respectcance for their well-being, a process that is calledppraisal (Tomaka et al., 1993). Humans then responds of activities undertaken to master, tolerate, reduce,e those threats or potentially harmful situations. Thesere called coping responses in the psychosocial literaturend Lazarus, 1985).nitive appraisals that anticipate the coping responseslong a continuum of threat to challenge perceptionsrnal event. Threat appraisals suggest potential dangerll-being or self-esteem, whereas challenging appraisalsuals to perceive the possibility of gain from the situationd Brewer, 2002). Whether individuals perceive the situ-reat or as a challenge depends on their judgments abouto which situational demands are perceived as within orir own resources or ability to cope with the demandstion. These judgments, in turn, depend on a two-stageppraisal, including rst primary appraisal and then thecondary appraisal (Lazarus, 1966). appraisal concerns the positive or negative signi-ituation for a persons well-being. Secondary appraisalhe ability to handle the situation with success relyingurces at a persons disposal (Scherer, 1999; Lazarusan, 1984). Given this, threat appraisals are those inerception of harm exceeds the perception of abilitiesces to cope with the situation. In contrast, challengeare those in which the perception of harm does not perception of ability to cope with the event (Tomaka.ocial researchers have also found two fundamentalpeople use to cope with (i.e., respond to) stressful sit-pite seeing them as challenging or threatening (Coyne Lazarus and Folkman, 1984). One of these coping strate-ed problem-focused coping, also labeled primary copingearchers (e.g., Rothbaum et al., 1982). In the same line,rategy is known as emotion-focused or secondary cop- coping refers to the actions that people take with theoving or circumventing the sources of stress in the situ-coping strategy comprises active oriented behaviors totuations, including exerting more effort at a task, and resilient and assertive, effectively using ones socialg more attention to the behavior of ones interactionell as cool, rational, deliberate efforts to solve the prob-an et al., 1986; Mallett and Swim, 2005). Secondarythe other hand, is related to the attempt to reduce orhe emotional distress associated with the stressful sit- coping strategy includes accommodative and passiveuch as accepting what is happening with resignation,e situation, escape through fantasy, and going with theier et al., 1986). In short, primary coping attempts toenvironment so that it conforms to ones needs, whereasoping tries to adapt the self to the environment (Mallett2005).mmon sense and scientic research usually expressdice against secondary coping because it reects a pas-commodative set of behaviors not directly aimed atlving in difcult situations. Some see secondary cop-eparatory stage for the more rational primary copingM.P. Lopes / The Journal of Socio-Economics 40 (2011) 652 659 655(e.g., Scheier et al., 1986). But from an adaptive point of view, sec-ondary coping is as important as primary coping, a fact that isparticularly clear when one thinks of situations where one can-not directly control or intervene in the environment (such as,for instancecial marketmechanismin secondarful uncontrsurgery, coprecourse toreduce the tant than pexternal strbetter undepatterns em3.2. CurrenresponsesAmong tresponses afuture. Mosare positiveTaylor, 1997optimism athe future to positivelas active coemotional soptimism aself-controloptimism luseful to atand engageceived as prPessimisand accommstrategies (Bmight explament, increother outpuBut the strategies hto be. Firstsimistic indsecondary cviduals can,outcomes snetworks, aoutputs thaand Chang,The mosview a situin advance ipatory malater need face (Held, this explanpessimism quences as the same lipessimists broutes, andand start totion and nethese recent ndings suggest that in certain situations pessimistsare able and eager to engage in active coping.Second, the relationship between optimism and coping strate-gies is not straightforward because recent research has also showntimiamplspinwd accdamastic dch arounntrar withng thand he sikelyuatiogene knopsyccan tnt adure. is pren ch in ph pr revefacinies oeivece p and rom uatiot, opts haor tual co appm-foirect o difftrollat andptionr of or asldsmo be sychsaid that theexpeer, r ndited issim, a severe economic crisis or an uncontrollable nan-s performance). For example, research on the adaptives of cancer-diagnosed patients has shown that engagingy coping strategies can help people to overcome stress-ollable adverse events. Both before and after a cancering strategies such as acceptance, positive reframing, religion, and the use of humor, have been found tolevels of stress (Carver et al., 1993). Thus, more impor-reaching the benets of a certain kind of response toessful events, it turns out to be more interesting torstand when it is that each of the adaptive responseerges.t state of research on expectations and copinghe most researched psychosocial predictors of copingre optimistic and pessimistic expectations toward thet of this research argues that optimistic expectationsly related to primary coping strategies (Aspinwall and; Scheier et al., 1986). Social psychologists have deneds the generalized belief that good things will happen in(Scheier and Carver, 1985). Optimism has been foundy relate with several primary coping strategies suchping, planning, and deliberate seeking of social andupport (Scheier et al., 1994). This relationship betweennd primary coping can be explained by the well known theory (Carver and Scheier, 1982), according to whicheads individuals to believe that further efforts can betain their goals, leading them to take more active steps in more active coping because their efforts are per-oductive.m, on the other hand, was rst associated with passivityodative behavior, relying mostly on secondary copingryant and Cvengros, 2004; Malloy and Fyfe, 1980). Thisin why optimistic people usually show higher achieve-ased perseverance, and greater work motivation amongts, than do pessimists (Carver et al., 1993).relationship between optimism/pessimism and copingas not proven to be as straightforward as it rst seemed, recent studies have clashed with the idea that pes-ividuals are necessarily passive and engage mainly inoping. Studies have found that more pessimistic indi- at least in some situations, also evidence better positiveuch as academic achievement, supportive friendshipnd progress toward personal goals active behavioralt would be predicted chiey by primary coping (Norem 2002).t credited explanation for this has been that those whoation in a pessimistic way are more prone to preparefor the adversities of the future, searching in an antic-nner for the resources and solutions that they mightfor solving the problems and burdens they expect to2004). Peterson and Chang (2003) have synthesizedation by asserting that pessimists probably use theiras a strategy to think about potential negative conse-a means to self-motivate toward proactive behavior. Inne, Lopes and Cunha (2008) have recently found thatecome less passive when they foresee potential action suggested that pessimists might discard their passivity act when they perceive that they are in a difcult situa-ed to devise plans to overcome the adversities. All in all,that opFor exlem, Ashowewhen optimilem, suundergthe coditionschangidirect when tmore lthe sit3.3. A Thesocial nisms differethe futmodelWhengageing higpeopleWhen strategIn percto redu(Lopesment fthe sitply putheorieof majexternpeopleprobleA dreact tunconevidenassuma drivebehaviand Goneed t4. A pAs ables towardtainty Howevrecentpresenthat pesm does not always lead to primary or active coping.e, in a eld study using the Y2K millennium bug prob-all et al. (2005) found that some optimistic individualsommodative, secondary coping strategies. Particularlyge estimates were perceived as high, those who wereid not become active in trying to overcome the prob-s stocking several days worth of food and water in and shelter or making copies of their PCs hard disk. Ony, those who were optimistic responded in these con- accommodative and secondary coping strategies (i.e.,e understanding of the situation rather than initiatingpersonal actions to try to change the situation). Thus,ituation is perceived to be uncontrollable, optimists are to disengage from active problem-solving and acceptn more passively.ral psychosocial model of human adaptationwledge accumulated over the last years in the eld ofhology regarding the core human adaptation mecha-hus be integrated in a general model that relates theseaptation strategies with individual expectations towardThe representation of that general human adaptationesented in Fig. 1 and can be described as follows.allenged by controllable events, optimistic individualsroblem-focused and primary coping strategies, evidenc-oactivity levels. In the same kind of events, pessimistical a high propensity to passive behavior and anomie.g more uncontrollable situations though, the copingf optimistic and pessimistic persons seem to reverse.d uncontrollable events, pessimism serves as a triggerassivity, somewhat increasing problem-focused copingCunha, 2008), whereas optimism leads to a disengage-active problem-solving and to a passive acceptance ofn (cf. Aspinwall et al., 2005; Scheier et al., 1986). Sim-imism is not always the driver of action that many pastve considered it to be. In certain contexts such as thoserbulence and instability that lead to a perceived lowntrollability, pessimism seems to be the key to makeraise events as challenging and lead them to engage incused and primary coping.link to how this model matters in explaining how peopleerent economic environments (namely, controllable vs.ble and expanding vs. contracting economies) is quite will be further discussed below. But the widespread that the optimism of economic agents is necessarilyinvestment, innovation, and entrepreneurial proactivesumed by several leading economists (e.g., Andersonith, 1997; Katona, 1979, 1968; Keynes, 1936) mightcomplemented with a contextualized moderation.osocial explanation for economic cyclesat the beginning of this paper, among the critical vari-Katona considered were the optimistic expectations future and condence vs. the pessimism and uncer-cted regarding external environments (Katona, 1979).econsidering Katonas assumptions in the light of thengs on social psychology revised above and of the modeln Fig. 1 of this paper, one must revisit his assertionsism is necessarily associated with uncertainty. In the656 M.P. Lopes / The Journal of Socio-Economics 40 (2011) 652 659Fig. 1. A general psychosocial model of human adaptation.same way, one must also accept that the linear positive relation-ship between positive consumer expectations (i.e., optimism) andconsumer active behavior (i.e., purchasing) might be moderatedby other contextual variables, such as controllability and contextpredictability.As such, it seems clear that the model presented herein helpsto complement and increment these earlier works and our under-standing ofin psycholothe major pbehavior sudevelopmetory modelperspectiveBecausechanges in lation, so does the economy follow its natural and endogenouscyclical route, which according to the majority of models occur ina 4-phase cycle of (1) prosperity, (2) recession, (3) depression, and(4) revival (Kuznets, 1940).The model considers an elliptical form to describe how apersons optimistic and pessimistic expectations as well as herperceived controllability/uncontrollability over external events can desonal istenwingcal e leveiterat modat th consumer behavior and the economic cycles. Researchgy has greatly improved in the last decades concerningsychological predictive variables of aggregate consumerch as optimism and perceived control. Given thesents described above, I can thus propose an explana- for economic cycles based on a socialpsychological. The model is graphically represented in Fig. 2. there are regularities in the factors of growth, such aspopulation demographics and in savings and accumu-help totraditithe exdownsempiritimentcycle lTheWhen Fig. 2. An elliptical model of human adaptation throughcribe the patterns of human adaptation during the fourphases of economic cycles. The use of an ellipse stressesce of turning points, both for the upswings and thes. This is congruent with research that has found thevidence of these turning points at the consumer sen-l (Katona, 1971), and is consistent with the economicure.els dynamics can be described in the following way.e top of optimism, and because people perceive their the economic cycles.M.P. Lopes / The Journal of Socio-Economics 40 (2011) 652 659 657socio-economic environment as somewhat predictable and con-trollable, they engage in active coping and they achieve productivelevels and protable initiatives, such as entrepreneurial activitiesand spending. At this stage, power structures have developed andcrystallizedproblem-sotheir maximchallenges atations are can no longstart to becoperformancsponds to thperformancSo at rpositive expand pessimOnce more,on performing even futime perceias things stimes. In thcial researcstrategies. exacerbatincongruent person is uhe is unabletion consistconsists of p. 21).Howevetrollability in coping. Areviewed abstart takingwork of LoThese authpessimisticresponse toagree with Kthe face of upeople. Whtainty promas an adaptparallel busdo not resulit occurs dusistent withpeople feel this, in turnsides (De GEventuapeople in tha low and leading to economic pthis transitcome, mostperceive socoping. As masses tendpoint they subsequentals coping pto be predictable and controllable. Coming from the last recoveryphase, people experience a new sense of hope that makes them feelhighly motivated and willing to try new approaches. Alienation andanomie are low and problem-solving is creative. People can againe enic p anal in plicy tionompmechon aationistico papromped ting have theclusnomve exs, 19pmeit posm, p as les of gresean inf huajortimipmeing o an er poafter whetter fe ands parl perexclationIn facaken notey f. Nor econway ssertg wason aevidousee exed hs. and creative social learning gives way to incrementallving. Bugs have been eliminated and processes obtainum efciency, but motivation starts to level off asre reduced (De Greene, 1988). Because positive expec-at their maximum, at some point the achieved resultser correspond to those expectations and expectationsme more negative. Because, as we have seen, economice appears with a lag of about 69 months, this corre-e prosperity phase of the economic cycle, as economice is reecting previous highly optimistic expectations.st, people are obtaining positive results, but as theirectations rise, prosperity levels become unsatisfactoryism and frustration start to take over (Rtheli, 2010). given the time lag between sentiment and its impactance, economic performance soon decreases, reinforc-rther peoples pessimistic expectations. At the sameved uncontrollability over ones environment increases,tart not to function as they used to in prosperousis context, as predicted by the model and psychoso-h, people start to disengage and adopt passive copingBecause of this passive behavior a recession sets in,g the pessimism and perceived lack of control. This iswith earlier empirical results indicating that when ancertain about the future or is disappointed because to accomplish what he wishes, the process of adapta-s of scaling down his aspirations (. . .). The extreme caseresignation and the stiing of wants. (Katona, 1968,r, as pessimism increases in the face of perceived uncon-and poor economic performance, it leads to a changes conrmed by several studies from social psychologyove, in this situation people draw on active coping and action to try to solve their problems. The above citedpes and Cunha (2008) is again relevant at this point.ors found empirical evidence supporting the idea that people will engage in alternative actions as a form of perceived uncertain environments. So, whereas I wouldatona (1968) that people scale down their aspiration inncertainty, I argue that it will happen only for optimisticen people are pessimistic, on the other hand, uncer-otes the emergence of new and alternative aspirationsation strategy, such as nding a second job or starting ainess. Because these psychosocial adaptation behaviorst in an immediate change in the economic performance,ring the depression phase of the economy. This is con- some authors assertion that in the depression phasethat there is nothing to lose by trying out new ideas and, increases activity at both the consumer and producerreene, 1988).lly, the proactive actions undertaken by pessimistice depression phase start to obtain results, along withnegative expectation toward economic performance,an increase of both optimism and relatively positiveerformance, ushering in the recovery phase. Of courseion is not immediate and pessimism is hard to over- of all because at some stage pessimistic people start tome control over the events and disengage from activesome have stated, optimism and pessimism of the to change slowly (Katona, 1979, p. 125), but at someboth can eventually be defeated and give rise to the wave of prosperity, led by highly optimistic individu-roactively as they perceive their new economic realityfeel theconomThementsand poing sechere ctation based expectpessimleads tmight develoto exiswhichtowardtor.5. ConEconegati(Keynedevelomade optimias wellmodelof the pposed study oA mthat opdevelo(upswduringa bettein the outsetit is bepassivThioreticarelied expectment. been tment.I amthat thmentsamongin the who alookin(Anderfound how hpositivproposdictiontrepreneurial spirit (De Greene, 1988), bringing againrosperity.yses of economic cycles based on these recent develop-sychosocial theories of adaptation bring new insightsimplications that will be discussed in the conclud-. For now, I wish to stress that the model developedlements previous studies on the role of human adap-anisms toward different economic settings that were positive bias toward the positive value of optimistics concerning the future and a negative prejudice of expectations. As recent research has shown, optimismssive coping in certain situations, whereas pessimismote primary coping action at other moments. The modelin this paper therefore brings a major contribution psychoeconomic theories of economic development, usually overlooked the role of negative expectations future or have considered them as simply a bad indica-ions and implicationsists have long recognized the importance of positive andpectations on the behavior of the economy as a whole36; Schumpeter, 1939; Smith, 1759). However, recentnts in the eld of psychology and social psychology havessible to increase our knowledge of concepts such asessimism, and perceived control over external events,ad to the development of more integrative psychosocialeneral human adaptation. This is the main contributionnt paper. After revising this novel literature, I have pro-tegrative model that social scientists can apply to theman adaptive behavioral patterns. conclusion that is derived from the proposed model isstic expectations do not always lead to higher economicnt, but depend on the phase of the economic contextr downswing). In fact, in certain economic contexts (e.g.,conomic downturn) pessimistic expectations should besitive predictor of how fast the economy will recovermath. It seems useless to communicate an optimisticn the context is one of uncertainty. In those situations,or people to become pessimistic in order to become less start to take action to improve their economic situation.ticular nding is of utmost importance to advance the-spectives of economic and business cycles that haveusively on the assumption that generalized positives are always in the best interest of economic develop-t, this is somewhat counterintuitive and often has not into account in earlier models of economic develop- saying that previous models were wrong, but insteadunction primarily in perceived controllable environ-mally, i.e., when there exists a controllable sentimentomic agents, expectations impact investment behaviorpredicted by economists like J.M. Kaynes, for instance,ed that expectations drive investment in a forwardy much more than the observations of past events dond Goldsmith, 1997). That explains why Katona (1968)ence that expectations are relevant in understandingholds consumption decisions over durables, and thatpectation is the one driving consumption. The modelere is consistent with these previous models and pre-658 M.P. Lopes / The Journal of Socio-Economics 40 (2011) 652 659However, considering that human behavior patterns reversein times of perceived uncertainty and controllability adds valueto these explanations, it helps to explain some previous ndingsthat did not t those monotonic models. For instance, the modeladvanced inwhy pessimKatonas (19how economone does noconsumptioSo againous modelsus to reintemodels (i.e.lability) andinterpret alpessimisticinvestmentmakes a sigIn additretical misaas those rebased theirdevelopmeand nancishould seeknomic agenand similarmajor goalsHowevement actionsocioecono258) remarperceived einterest rateally increasThis producand stock pprice bubblcases of ponot been coin Europe (RClear evin measurinof consumeare today thperception of attentionoptimism aengage in mand investmitor perceivconsumer sbility sentimeconomic intary policy-In additithis paper Katona (198of the 1970more stronnomic policthe model ptance of conas a major lGiven the novel contribution of the model proposed on thispaper and the counterintuitive character of some of its assump-tions, several criticisms might be raised. A relevant point is thatof whether optimistic/pessimistic expectations are adequate to how nath. A howsirstlyr et has rterisyle sm aon ay sta accostic pic ptes trceivtherve re This on hic bive b, ondeveo-sohis phe mor beinates. Tle eq Althemeudie presstionoratiper w of tum, logicrent peolarlyute ism becns foic rof wessimi, 201s hoic cpe tconocourve eman the present paper allows one to better understandism dispelled uncertainty around the year of 1974 in79) data analysis. In fact, it would be difcult to explainic development would turn around after a setback ift assume that pessimism could play a role in stimulatingn., the model proposed here does not go against previ- of economic development. On the contrary, it allowsrpret the results obtained when testing those previous, that they function well in times of perceived control- expand the explanations by incorporating a way toso the events that do not t those models (i.e., that a outlook is, at times, the key element for consumption, and economic development). As a result, this papernicant contribution to this literature.ion, and probably also as a consequence of this theo-ssumption, policy-makers and nancial experts suchsponsible for monetary-policy management have also decision-making on an imperfect model of economicnt. This conclusion has clear implications for economical policies. One of the implications is that authorities to promote the perception of controllability by eco-ts over the economic environment. For central banks authorities, price stability has been, in fact, one of the of their policies and actions (Mayer, 2008).r, by aiming to achieve price stability they often imple-s that trigger even higher levels of instability in othermic dimensions. As for instance De Grauwe (2008, p.ks concerning how central banks act on the edge of aconomic downturn, agents interpret a decline in the as signaling future ination. As a result, ination actu-es forcing the central bank to raise the interest rate.es a stopgo policy that destabilizes output, inationrices and seems to play a critical role in inducing assetes (Mayer, 2008). Some have recently also noted that thelicy making adding to uncertainty and instability havenned to the U.S. but spread worldwide, particularlytheli, 2010).idence of policy insensitivity to this issue is the neglectg controllability perceptions by authorities. Measuresr sentiment have gained their correct importance andoroughly followed, but a systematic measurement ofof control or controllability sentiment is still in need. Future research should thus seek to determine thend controllability thresholds at which people start toore proactive coping behaviors, including consumerent decisions. To achieve that, authorities must mon-ed controllability as much as they already monitorentiment. Making-decisions informed by the controlla-ent as much as by the consumer sentiment and otherdicators is a clear and important implication for mone-makers, particularly for those managing central banks.on to nancial policy implications, the conclusions ofshould also impact general economic policy making.0, p. 33) found, for instance, that during the recessions the index of consumer sentiment correlated muchgly with peoples condence in the governments eco-ies than with past price movements. This is in line withroposed in the current paper, which stresses the impor-trollability and the consequent condence of citizenseverage of positive economic development.explainlastingresearcever, sstate. F(Scheiemism charactory stoptimi(Petersviduallchangeoptimieconomical staand peAnoadaptitation.(1759)economcollectcautionrstly a macrAt ting if tbehavidiscrimvariablmultip1999).advancther stmodelcal queincorpthis paof eachIn spsychoto diffeto howparticucontribpessimpeoplesolutioeconomstages over-pRthelexplaineconompaper.I hotonic eand enposititation people adapt to economic changes given the long-ure that these psychological traits evidence in somereview of the psychological literature on this topic, how- that optimism can be conceived as either a trait or a based in the work of Scheier on dispositional optimismal., 1994; Scheier and Carver, 1985), the study of opti-ecently been approached as a state-like psychologicaltic. The work of Peterson and Seligman on the explana-hypothesis and the writings of Seligman on learnednd learned helplessness are other relevant examplesnd Chang, 2003) evidencing that beyond relatively indi-ble psychological traits, peoples psychological states dording to external conditions. Even an individual with anersonality will lower that optimism in the face of harderspectives. It is relative to this variability in psycholog-hat researchers should interpret changes in optimismed controllability. signicant issue is that of whether an individual-levelsponse can generalize to a macro-societal level of adap- should let us turn to the classic conjectures of Smithow individual action produces macro-level social andehavior. Although these relations between individual-ehavior are complex and must be considered withly an empirical test of how generalized these modelsloped at an individual and psychological level can be tocietal level.oint, this relates to the nal important issue of conclud-odel proposed in this paper actually explains economicyond other relevant variables such as poverty, wageion, household problems, bankruptcy and many otherhis issue also relates to the current fashion topic ofuilibria in economic theory (e.g., Hillier and Rougier,ough these are very important points, we leave furthernts of predictions based on multiple equilibria for fur-s. If accepted at this stage as a worthwhile model, theented in this paper will ultimately raise new empiri-s which only future research will allow answering. Theon of the variables considered in the model presented inill, in future research, allow for the test of the inuencehese different variables.I have shown that the recent developments in socio-al research concerning the adaptive human processes uncertainty contexts can be extremely informative asple will react to different economic situations. I have predicted that optimism will not always positivelyto economic growth, and that in certain situationsis the mindset that will positively contribute to makeome entrepreneurial and proactive in nding newr the adversities they face and, thus, contribute toecovery. There seems to be no doubt that the notion ofide-spread over-optimism in expectations followed byism has been part of economics for years (Leiser and0, p. 117). But an integrated model that simultaneouslyw optimism and pessimism are complements in theycle was still missing. 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George Allen and Unwin,A psychosocial explanation of economic cycles1 Introduction2 Current explanations for economic cycles3 Psychosocial approaches to human adaptation3.1 Current state of human adaptation theories3.2 Current state of research on expectations and coping responses3.3 A general psychosocial model of human adaptation4 A psychosocial explanation for economic cycles5 Conclusions and implicationsReferences