Since the outbreak of COVID 19, the lives of people all around the world have shifted drastically. From social distancing to endless quarantine, numerous sudden changes in our lifestyle have greatly impacted both our macroeconomy and our management of our personal finances. The unprecedented societal disruptions have left many people financially traumatized, and irrevocably affected our ideas around money. It is important to fully realize that such changes may be permanent, and recovery may require a learning curve for many of us.
Although daily life appeared to come to a screeching halt during the past five months, the shift in people’s attitudes toward money and finance accelerated. Fear, confusion, and uncertainty thrust whole populations into survival mode, with citizens frantically purchasing and hoarding common household items, leaving supermarket shelves empty. BBC news journalist Bryan Lufkin explained the reasoning behind such blind panic reactions as “fear of the unknown, and [the belief] that a dramatic event warrants a dramatic response—even though, in this case, the best response is something as mundane as washing your hands.”
Looking back, we may categorize such extreme emotional activity as irrational and unreasonable. However, David Savage, an associate professor of behavior and microeconomics, wrote, “But emotions are not irrational: they help us decide how to focus our attention” (The Conversation, 2020). As humans, our emotions play a large and important part in decision making, both in response to possibly life-threatening external factors—such as the pandemic—and considerations as mundane as personal finance. In “normal” times, certain reactions might seem unhinged and fanatical; however acknowledging, examining, and valuing our emotions can help us decipher what our feelings may be trying to convey.
Five months into the global crisis, mask-wearing is the norm and the term “social distancing” is part of our daily vocabulary. At the same time, we have weathered losses not seen since the Great Depression, both in employment and in overall personal wealth, radically altering our usual patterns of spending. Baker and colleagues (2020) recently studied household expenditures in the United States, finding a sudden, steep increase in spending between February 26th and March 10th, followed by a 50% downward spike, then another sharp drop. Behavior being a clear reflection of emotions, the upward surge was easily attributable to the “fight-or-flight” survival response, as large segments of the public hurried to stockpile certain grocery items. The subsequent precipitous decrease clearly illuminated the struggle of many families to pay their bills. Different populations have adapted to this new state of adversity by fundamentally modifying former habits and priorities. It is evident that, for many, “getting and spending” currently take a back seat to saving up for an uncertain future and maintaining as much control as possible over family finances.
Conversely, others found themselves turning to compulsive online shopping— “retail therapy”—in an attempt to “medicate” their distress. Instead of relief, this behavior only served to exacerbate their anxiety as their reckless spending increased their financial problems. Along with mounting dread over deepening debt came feelings of deep shame and self-recrimination over the increased danger of unrestrained shopping spreading infection to delivery personnel and others.
As consequences of the pandemic continue to mount, new behaviors—rooted in adverse experiences and emotions during this time—will certainly materialize. CNBC reporter Chloe Taylor (2020) wrote that “a generation of risk-averse supersavers could emerge from the fallout of the coronavirus crisis and potentially reshape the economy.” The widespread economic misfortune this pandemic has inflicted may affect the ways we manage our money far into the future. Many individuals may become much more cautious about extending themselves for financial gain. An increase in precautionary savings in the U.S. is similarly likely.
On the other hand, other sources argue that this is a temporary and a relatively small financial setback in a much bigger world. Daniel Crosby, a well-known psychologist and a behavioural finance expert writes, “It’s human nature to assume that all we see is all that will ever be, but markets operate on a more forward-looking basis and realize that ‘this too shall pass.’ ”. He emphasizes the importance of believing in a better and brighter future in order to be the best investors we can be. As mentioned above, it is a small bump in a larger scheme of things – the market does not radically change overnight and it might be in our best interest to recognize the importance of consistency by not changing our behaviour as much.
While a lot of us would choose to be proactive in terms of managing our finances, many who have been deeply wounded and traumatized worry that a successful economic adjustment may take months or years to achieve. It is helpful to acknowledge that, throughout this pandemic, workable adaptations were made quickly and reasonably. This is proof of the power of our emotions and thoughts over unconscious behavior.
Many of us previously approached our lives without a moment of doubt over the apparent permanence of our social structures. That notion crumbled before our eyes, serving as a much-needed wakeup call. The resulting rapid shift of a whole generation’s former capricious financial behavior to a “tighten-your-belt” mentality clearly proved that harnessing our emotions can change our money habits in positive, if unpredictable, ways.
Our human capacity for adaptation over a very short period of time does not mean, however, that we can expect to coast back to “normal” at the same velocity. The unexpected crisis exposed an already precarious economic situation for many people, revealing the missing elements of thought and planning in their approach to money management. It has been a series of chaotic months for a lot of us financially. Moving forward, while we might assume that from all we have endured, our actions will reflect our experience and will be nothing like what we expected before; however, the intricate financial world does not change easily. In order to achieve a similar state as pre-covid, it may be in our best interest to keep the bigger and brighter picture in mind and seek for continuity and stability. Although it is tempting to believe that our lives will eventually return to their 2019 standard, the indelible lesson is that we must learn how to respect and understand our own emotional reactions if we are to effectively guide our financial affairs with intention and forethought. The alternative is to continue to find ourselves at the mercy of circumstance.
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Savage, D. A., & Torgler, B. (2020, April 24). Stocking up to prepare for a crisis isn’t “panic buying.” It’s actually a pretty rational choice. Retrieved August 13, 2020, from https://theconversation.com/stocking-up-to-prepare-for-a-crisis-isnt-panic-buying-its-actu ally-a-pretty-rational-choice-132437.
Lufkin, B. (2020, March 4). Coronavirus: The psychology of panic buying. Retrieved August 13, 2020, from https://www.bbc.com/worklife/artic le/20200304-coronavirus-covid-19-update-why-people-are-stockpiling.
Taylor, C. (2020, April 03). Coronavirus could create “a generation of supersavers” and reshape the economy. Retrieved August 13, 2020, from https://www.cnbc.com/2020/04/03/coronavirus-m ay-create-a-generation-of-supersavers-who-reshape-economy.html.
Baker, S., Farrokhnia, R., Meyer, S., Pagel, M., & Yannelis, C. (2020). How Does Household Spending Respond to an Epidemic? Consumption During the 2020 COVID-19 Pandemic. doi:10.3386/w26949.
Daniel Crosby, D. (2020, August 11). The Strange Psychology of COVID-19 and Investor Behavior. Retrieved August 24, 2020, from https://www.kiplinger.com/investing/601211/the-strange-psychology-of-covid-19-and-investor-behavior.