Can fear define an economy?

Behavioural economics is an aspect of economics, where elements of psychology are added to traditional mathematical models in order to better understand decision-making. I have become fascinated by these studies and have recently read many books regarding different behavioural economic researches. Economics is a study of understanding the choices individuals within an industry make and I believe taking into account emotions is a pivotal aspect in making economic predictions.

Lets look into the issue of fear within economics. It can’t be denied that the fear of future global events and economic history influence economic decision-making. A main cause of fear within an economy is uncertainty as handling large sums of money is not made easier when events occurring in the global economy make it hard to predict what will happen. That is one of the main concerns of Brexit, the uncertainty.

Hysteresis is an idea that can show the impact of fear on consumer behaviour. Hysteresis is when people are influenced by events in the past. Even if circumstances are different in the present and there is strong evidence of improvements from past events, this still remains a strong influencing point within people making economic decisions. One study I did which seemed to support this theory is the fluctuation of demand for inferior goods within an economy.

An inferior good is a good a consumer would demand less off if their income level increased. Examples of companies that operate for the sale of inferior goods are Primark and Poundland. Traditionally, companies selling inferior goods would see an increase in sales during times of recession and a fall in demand during strong periods of economic activity. However, recent research I did into businesses that fall under this category suggested signs of continued growth even during this period of recovery since the 2008 recession.

Companies like Primark and Sports Direct have continued to see exponential growth post the recession, which contradicts past trends. I believe the theory of hysteresis can be argued as a cause of this. Consumers who may have lost money during the 2008 recession may be incentivised to spend their money more carefully and purchase goods from these companies in fear of another recession occurring.

The issue of fear is a very real problem in economics and it is one that must be taken into account when studying economic trends. It’s important to view things from a consumer’s view, who may have inadequate information about things occurring in their economy (inflation rates, economy growth rates etc). When fear influences an individual’s decisions, it can contradict any mathematical model that has solely been formulated off past trends, essentially altering the way we have been looking at an aspect of economics.