Do Psychological Factors Emanating from a Financial Crisis Affect Consumption? Evidence from China

By Voon, Jan P.; Ruifang, Zhang | China: An International Journal, April 2013 | Go to article overview

Do Psychological Factors Emanating from a Financial Crisis Affect Consumption? Evidence from China


Voon, Jan P., Ruifang, Zhang, China: An International Journal


INTRODUCTION

An economic downturn in one source country, wrought by a financial crisis, epidemic, recession or any other exogenous shock, can exert huge negative contagion effects on the domestic economy as well as on other countries. In recent decades, recessionary impacts have become more frequent and the scale of the recessions has also become more complex and larger. (1) Enormous tangible and intangible (or psychological) costs are often incurred, including job losses, job insecurity, pay reductions, wealth evaporation due to losses of personal assets or investments, experience of work stress, and pessimism about the future, among others. (2) In light of the above, this article develops and tests a model of consumption with different psychological states emanating from an economic downturn explicitly built into the model. There has been a paucity of research on the psychological determinants of consumption: previous studies have been mainly devoted to examining the effects of financial crises on unemployment. (3)

Our model is applicable under economic uncertainty when consumption decision processes are subject to various economic and psychological influences. (4) There are many different psychological influences. Anticipatory emotions, for instance, are immediate ex ante visceral reactions often felt before the consumption, whereas anticipated emotions such as regret and disappointment are ex post. (5) This article focuses on anticipatory feeling in which psychological influences serve as antecedents to consumption. More specifically, psychological changes such as anxiety, job insecurity perception and future optimism/pessimism were the outcomes of the global financial crisis (GFC) and these changes may then affect household consumption. Past efforts were directed to research on permanent income (6) or life cycle models of consumption. (7) These models examine how changes in income affect consumption. The behavioural life-cycle model of consumption advanced by Shefrin and Thaler explored how income and wealth (current and future) could affect consumption, but psychological states were not modelled. (8) Caplin and Leahy examined anticipatory feeling under economic uncertainty, but they focused on expected utility, not consumption per se. (9) Moreover, their analysis was theoretically focused.

This article recognises that different groups of consumers (e.g., employed and unemployed) may be affected to a different extent by an uncertain event, such as the GFC. For example, employed workers appear to be subject to higher job insecurity and more employment stress than unemployed people. From our random household survey, about one out of three of the sample population in China was unemployed--which this article defines as those who are not in the labour market, such as retirees, housewives and full-time students. The data set was divided into two categories, namely the employed and unemployed, for a comparative study of the consumption behaviour between them. The psychological states and consumption patterns of these two groups of consumers were affected differently by the GFC.

The next section of this article outlines the model, specifically the role of psychology in consumption. The questionnaires, household survey data and some data description are presented in the third section. The fourth section presents the results arising from the empirical analysis. The conclusions and some policy implications are given in the final section.

ROLE OF PSYCHOLOGICAL VARIABLES

According to the conservation of resources (COR) theory, (10) the loss of economic resources due to a recession can yield immense psychological influence. (11) Psychological heuristics are very important in influencing economic decisions. (12) During a recession, the economic environment can become very uncertain. The cognitive and affective processes could be the dominant pathways affecting consumption decisions because the analytic processes may be impeded by ignorance of the event, inability to control the situation, market failures, or the fact that information about a financial crisis is too complicated. …

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