Running blind

MANAGEMENT:Uncertainty has played a huge role in this downturn, and with uncertainty comes fear. The solution? Some good old-fashioned straight- talking, writes CAROLINE MADDEN

'PSYCHOLOGY IS the joker in the economy's deck of cards." These words are even more relevant today than when uttered by a senior US banking official, and quoted in Time magazine over 50 years ago.

Recessionary fears have infiltrated the psychology of the consumer, with the result that belts have been drawn corset-tight. After a decade of profligacy, tills are no longer ringing merrily. Tumbleweeds blow through deserted garage forecourts. The great Irish consumer has gone to ground.

Unfortunately, the ripple effect of locking away their credit cards can actually amplify and perpetuate the very recession consumers are hoping to shield themselves from. What can be done to restore consumer confidence and break this vicious psychological circle?

The problem is that confidence is a slippery concept. It doesn't fit neatly into the graphs and equations so favoured by economists. Practitioners of the dismal science prefer to stick to facts, figures and fundamentals and steer clear of murky notions of sentiment and self-fulfilling prophecies.

Ask an old-school economist for the antidote to a recession and they'll say cut taxes and increase government spending. But apart from the fact the sorry state of the public coffers means this isn't an option for the Irish Government, traditional approaches may not hold all the answers this time around. Why? Because this is not a traditional downturn.

"Recessions have come along before, but this recession is actually quite different, and the reason is because of the role of the financial crisis," says behavioural economist Pete Lunn, author of Basic Instincts: Human Nature and the New Economics.

Confidence, or lack thereof, is playing a far greater role in this economic slump than in previous cycles. For example, consumer confidence in the US is as low as it's been since the 1930s, but initial figures haven't shown the current downturn to be anywhere near as deep - yet - as recessions in the interim. So why has confidence fallen to such a low ebb? The answer, according to Lunn, is uncertainty.

"Everybody is aware that even the people who are supposed to understand financial markets better than anybody else don't really know what's going to happen," he says. "The implications of this banking crisis are so uncertain, even to the experts, that the level of uncertainty everyone feels is greater than in previous recessions."

As human beings, we have a psychological aversion to uncertainty, he explains. "It has a very negative effect. It prevents people from taking active decisions. It makes them much less likely to take bold investment decisions or bold decisions career-wise."

The key to breaking the potentially self-perpetuating cycle of falling consumer confidence, therefore, lies in reducing uncertainty - and quickly. As soon as "the powers that be" have an idea of how things are going to shake out, they need to start communicating that information straight away. "Even if the news is bad, people like to know where they stand," he says. "It will help people make better decisions for themselves and feel more confident taking those decisions."

But if the news is bad, will people really want to hear it? In recent times, the media has been accused of having a bias towards negative news because - so the theory goes - bad news sells. Is this criticism simply a case of shooting the messenger, or does the media have a financially-motivated recession obsession? And is it possible, as has been suggested, that we have talked ourselves into a recession?

"I think when we link the bad news idea with selling, we distort it," says Brian Trench, head of the School of Communications in DCU. "Human conversation tends to give priority to things that are risks and threats and dangers and hazards over the things that are running normally or routinely or satisfactorily. [This] helps us understand why we, as media consumers, actually expect the media to tell us what's going wrong.

"I think we should be really, really careful about slapping the media over the wrist for telling bad news, a) because I think we do it anyway without the media's help and b) because the alternative is too awful, which is that we only tell each other the reassuring news or the official news [as happens in authoritarian states]," says Trench. But surely the 24-hour live coverage of stock-market meltdowns and bank collapses breeds panic, deepening economic crises?

"There is very little evidence that in this world of mass media that we now live in, it has had any impact on the severity of economic cycles," says Lunn. "It takes a lot more than the media to cause these things."

However, Dan Ariely, a behavioural economist at MIT and author of Predictably Irrational: The Hidden Forces That Shape Our Decisions, says the constant barrage of negative news flow "makes us all more afraid".

"It is also the case that watching all these 'experts' on TV and radio makes us realise that no one really has a clue about what is going on, which is really worrisome," he said.

He added that the reason markets have not yet recovered is the loss of trust. Lunn agrees with this and says trust is "the unsung hero of economic activity". Not only must politicians inspire trust, employers also have a key role to play. "There's a tendency always to look to the government for answers, but the way businesses behave in recessions is crucial," he says.

Research carried out in the field of behavioural economics has shown that, in times of recession, employers prefer to take the extreme decision of letting staff go, rather than cutting wages. They believe wage cuts would undermine morale and lead to resentment on an ongoing basis, whereas redundancies are a short, sharp shock - painful at the time, but less damaging to morale in the long-term.

The research found this doesn't have to be the case. It is possible to reduce wages (rather than let staff go) without undue damage to morale, but only if trust exists.

"It depends, crucially, on how much trust there is between the workforce and the boss," says Lunn. "Workers will perceive less unfairness in taking a pay cut if they can see that the company has absolutely no choice."

If, however, workers get the faintest whiff that wages are being cut to increase the money made by the owners, or executive salaries, that trust will be undermined and resentment will set in. "Honesty and trust are crucial to the way individual businesses can keep their costs down without letting people go," he says. "When you add that up across society as a whole, it can have quite a profound effect on what your unemployment rate might be."

Employers hit by the recession must tread carefully when it comes to communicating bad news with staff. If they jump the gun and are too early in issuing dire warnings of the hard times that may lie ahead, they risk alarming staff unnecessarily.

On the other hand, employers who shelter staff from bad news to maintain productivity may find the rumour mill goes into overdrive and morale suffers anyway. It's a tough call, but the general consensus among business psychologists is that it's better to be upfront. "One of the pitfalls of trying to mask the situation is that people might assume the worst," says John Deely, organisational psychologist at Pinpoint. "What you want to avoid in an organisation, whatever size, is the scenario where hearsay is getting out, because that becomes a huge consumption of people's [concentration]."

Occupational psychologist Karen Fragolini agrees and says the adage "no news is good news" doesn't ring true in these circumstances, because the psychological impact of uncertainty has a negative impact on morale. "If you don't know the full story, it's a natural instinct to start fearing the worst."

Deely has found cost-cutting exercises are more stressful for people if changes are imposed upon them. "If you can get some autonomy on the decision, you will find, in the long run, that is a more productive thing to do," he says. For example, employers can offer staff the opportunity to take career breaks or avail of flexible working arrangements.

Psychologist Kate Quinlan advises employers to adopt a strategy of involvement - outline the problems faced and the goals that must be met in order for the business to remain viable, and ask employees for their input. But avoid making any false promises, she warns. At all times, the employer must be realistic.

When cutting costs, employers should also be careful not to create unnecessary resentment in return for small savings. A classic example of this is the staff Christmas party. By all means scale it down from previous years, but think long and hard before cancelling it altogether - the backlash is likely to be disproportionate to the savings achieved.

"It's an easy thing to do as an accountant to say 'the Christmas party is gone'," says Deely, "but I think it's a false economy because morale and satisfaction are what's required to drive your business forward."

Many experts have found if an employer manages a downturn in their business skilfully and keep the lines of communication open with staff, it is possible not only to galvanise a workforce but even to improve productivity.

"I've seen some outstanding projects done over the years, even in closure situations, where productivity has actually improved, where every deadline has been met, because people were treated extremely well and there was very good communication," says Gerard O'Shea of outplacement firm Sanders & Sidney/O'Shea. "People respond so well when they're treated well."