After years of historically loose monetary policy, trillions of dollars in stimulus checks, and supply-chain wreckage during the coronavirus pandemic, perhaps we shouldn’t be surprised that a recession is looming, and may already be upon us. But the fact that it is predictable doesn’t make the high prices, effectively lower wages, and tanking investments hurt any less.
You might be forgoing discretionary purchases just to fill up your gas tank and buy groceries. Perhaps you are postponing your vacation, or rethinking a much-anticipated life change, like getting married or moving. And although the job market looks good now, you might be starting to feel nervous about that too.
Along with material security, many Americans are losing their sense of control over their economic fate. When stock markets are declining quickly, almost no amount of work can keep retirement savings from falling, swallowing up months and years of sacrifice. If you’re a homeowner, knowing that your house is losing value comes with a special sense of helplessness.
The unhappiness that accompanies recession is real, and you’re not irrational if you feel it. Your instincts might tell you to fight these bad feelings by focusing on the problem intently and managing your affairs meticulously. But that’s not actually the best way to alleviate your suffering. To ride out the coming recession with your happiness intact, you’ll need to figure out how to pay less attention than your brain is telling you to.
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Not that you needed proof, but survey data show a strong link between happiness and the health of the economy. For example, researchers have found that the performance of the stock market affects Americans’ well-being. And the relationship goes both ways. In 2016, economists analyzed the “happiness sentiment” expressed in about 10 percent of all English-language Twitter posts made each day from late 2008 to mid-2015 and compared it with the performance of 11 international stock markets. They found evidence that higher expressed happiness in tweets parallels stock returns, presumably because happier investors tend to buy shares instead of sell them. If happiness raises stock returns, and stock returns raise happiness, a feedback loop could easily fuel a bubble. Conversely, we can also see how an emotional funk can reinforce economic recession, and thus why slumps can be hard to break.
Unfortunately for us, bad economic times seem to have a bigger effect on mood than good times do, and losses tend to bring people down more than gains bring them up. This is the central conclusion of “prospect theory,” an idea from the economics Nobel laureate Daniel Kahneman and the late psychologist Amos Tversky. Kahneman and Tversky calculated a “loss aversion ratio” of 1.5 to 2.5, meaning you would have to gain $15 to $25 to neutralize the mental pain of losing $10. That explains why we complain when gas rises in price by a dollar a gallon but barely notice when the price falls by the same amount, and why we freak out when the stock market loses 10 percent but don’t get very excited when it rises by 10 percent.
The economist Richard Thaler took the idea further with his concept of “myopic loss aversion,” which posits that when we are worried about losses, we tend to focus on them a lot, magnifying the issue in our mind. When the economy is tanking, you might add insult to injury by looking every day at your neighborhood gas station’s price sign or checking your pension constantly. Perhaps this instinct is a product of the Pleistocene, when your predecessors needed to pay attention to a threat so it didn’t kill them. Today, however, it simply means that you have the financial news on all day and walk around with dark circles under your eyes.
Research shows us that financial hardship leads to a vicious cycle of unhappiness: Recession begets misery, which makes for more economic bad times. You naturally make the pattern worse by following your loss-aversion instincts and focusing intently on the prices of gas and food, the estimated value of your house, and the numbers in your retirement account.
Although you probably can’t break the global economy out of this feedback loop, you can break yourself out of it. Start with the following three practices.
1. Stop checking.
Here is my advice as an economist: Make a prudent set of basic rules about your spending, savings, and investments. For example, make sure that you automatically save 15 percent of your income every month if you can, and if possible, have a rule against carrying any credit-card balances. Invest your savings in a way that makes sense over the long run—get some advice here if you need it. Then don’t monitor your finances daily or even weekly. Make a rule to look once a month (or once a quarter) at most.
2. Turn off the news.
Bingeing on information is a tempting way to try to eliminate the feelings of uncertainty that our current economic moment might inspire. But consuming news and commentary about the economy can become compulsive, and it won’t help. I can assure you that the experts don’t know what is going to happen either. You will not satiate your hunger for certainty with another hour of news; on the contrary, it will probably decrease your sense of control and increase your stress. Cut your news consumption down to 45 minutes or less, once a day. No cheating.
3. Remember you’re not alone.
When things are going south in your bank account, portfolio, or home value, it is easy to feel all alone in your misfortune, and to beat yourself up for not doing something before the economy started to tank. However, in a general recession, we are all in it together. You (probably) didn’t make some uniquely stupid investment decision against everyone else’s better judgment; you just got caught in a market downturn. There is an old expression in Spanish: “Mal de muchos, consuelo de tontos,” which means “The misfortune of many is the consolation of fools.” I say fine—why not be a fool and take some consolation in our collective pain?
Look at the market in aggregate, not your own accounts, if you really must check how the economy is doing. Remember all the people losing money like you, but who are in tougher circumstances—maybe they are a few months away from retiring, or counting on their nest egg to buy a house this fall. Feel some sympathy.
If you are wondering whether markets will recover, the answer is almost certainly yes. From World War II to 2021, the stock market has survived nine drops of the current magnitude (20 to 40 percent), and three even greater than this. The markets have recovered and gone on to grow every single time. A better question is how long the recovery will take. On average, declines like the one we are seeing have been erased in 14 to 58 months. It’s a fair bet that in a year and a half or so, all this unpleasantness could be in the rearview mirror.
When the economy does come back, you have another opportunity: to solve your recession-unhappiness problem before the next downswing. You can do this by not returning to your old habits that lead to more pain during bear markets than pleasure in bulls. Don’t celebrate when stocks go up and gas prices go down. Don’t count your money and move up your retirement date. If you want to end the boom and bust cycles in your happiness, you need to stay just as steady in the good times as you do in the bad.