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How do we see the world now? The five stages that everybody goes through in recessionland.

Steve Wallace & Bob Cook – 2009 December 10th

“I’m late, the bubble’s about to burst!”

said the banker


Everything we knew about ourselves and our customers is now wrong, the recession changed it all. Steve Wallace of National Chiao-Tung University and Bob Cook of Convince discuss the 5 psychological stages of the recession and how they affect business and business relationships.

There we were sitting on the river bank enjoying the pleasures of economic prosperity when up popped a banker saying “I’m late, the bubble’s about to burst”. A few seconds later the banker had disappeared down a large rabbit hole. In another moment down we went after it, never once considering how in the world we were to get out again. Unfortunately unlike Alice in Wonderland our rabbit hole is very real. We still seem to be falling unable to reach the bottom. Just like Alice the world we’ll find at the bottom is bound to be very different from our own world.

Overnight the business world has become both nightmarish and surreal. The certainties that shaped our lives for almost a decade are gone. As we fall we pass by the remains of once great American banks kept on life support by the government.  Images of panicking investors flash past our faces.  We see world leaders, with fear in their eyes, making reassuring speeches. This uncertainly has greater mental implications than many realize.  The psychology of every CEO, every employee and, equally importantly, every customer, has dramatically changed.

To understand these changes and to be able to deal with them let us look at the five psychological stages that individuals and groups experience during recessions:

Stage 1 – Shock and denial

Those that have undergone bereavement will understand this initial reaction to tragic news.  It’s the “This can’t be happening to me factor”. Even as orders dived many doubted the severity of the recession.  Maybe it wouldn’t affect their industry or their company – how could it?  After all 2008, had for many, seen record sales in the first half of the year.

During this stage behavior and motivations vary, from panic to shock, to a determination to maintain the status quo to those presently in denial.   This transitional stage is the least stable of the five stages, people may alternate between shock and denial, sometimes in the same day.  At  this stage companies positioned in the luxury and quality markets may still get orders from those rich enough to stay in denial.   However, even the wealthiest people must now have moved on from denial.

Stage 2 – Anger

Feelings of denial and shock change to anger.  Our years of hard work are producing reduced salaries and layoffs, our investments evaporate before our eyes, our mortgages become burdens, our ability to shape our own lives and future has gone.   This results in deep frustration – we know we did nothing wrong yet we are being punished, so who is to blame?   We angrily search for people and organizations to blame, both external and internal.  Politicians, countries, products, departments, divisions and individuals become scapegoats.   This is partly reflected in the targets of the first rounds of major cost cutting – products lines are slashed, divisions axed, and CEOs fired. In an atmosphere fueled by anger, layoffs and rumors, office politics increases. This anger, frustration and worry damages supplier relationships, and strengthen the psychological importance of apparent staff and customer loyalty to us.  At this stage the most effective advertising is that which targets unpopular products/brands making use of resentment to encourage switching.  One example of marketing through negative comparisons is the way that some small banks in the US are growing by reminding customers that they didn’t cause the subprime crises and don’t need government bailouts.

Stage 3 – Resignation and fear

As we resign ourselves to the fact that we are in a long term recession, the implications that this has for our jobs and our role in the company start to change our perceptions.  The mood in the office and at home darkens.  The dominant emotion becomes fear: Fear that we will be blamed for mistakes both past and present.  Fear that our company cannot survive.  Fear of losing our value to the company and being downsized. Such fear is driven by cost cutting, layoffs, and the constant stream of negative news. It results in a focus on self preservation – risk taking is minimized, our cost cutting creates value to the company.  We move down Maslow’s hierarchy of needs from desires of self esteem towards the more basic needs of safety. Our customers are more motivated by product costs, dependability and reassurance. Innovation, creativity and other factors that represent risk, become a liability. Lower cost and lower quality products become more appealing, because they not only save money but allow underworked staff to create job value by fixing related problems.  Most companies freeze non-essential spending, cut wages and extend payment periods. So individuals start to look for secondary jobs as a source of both cash and security. In business long payment schedules mean that  the financial health of business customers becomes an issue, resulting in a new relationship dynamic.

Stage 4 – Recession fatigue

‘Curiouser and curiouser!’ cried Alice

The recession drags on; the constant stress creates mental fatigue and physical fatigue. Fear has become such a normal part of our life that it no longer motivates us to try harder. This normalization has the effect reduced of urgency and combines with fatigue which results in hourly productivity drops. Whilst we still worry about our job security, the majority of layoffs and bankruptcies will have already taken place. Opportunities to further reduce costs are now limited, and payment schedules have become so stretched that securing orders no longer eases financial problems. Low cost has become a prerequisite to all purchases, as opposed to being a decision driver.

Since many individuals feel powerless to change their situation they avoid any negative recession related messages, turning the channel over when bad financial news appears on TV news and blanking recession focused advertising.  Expect to see people turn to escapism, just as mini golf and movies boomed in the latter years of the Great Depression, other more modern ways to escape reality such as computer games will grow rapidly.  Nostalgia for the safe good old days will help legacy brands and products survive this difficult period.

Alice looking for the door

Stage 5 – Recovery

After the long winter any signs that the spring has finally arrived will be welcomed. Months of mental tiredness will lead to a search for positive indicators and signs of recovery.  Finally there is good news and the economic situation starts to improve. As with any change, however positive, there will still be some in denial and some who resist the uncertainty that recovery brings. But this will gradually abate as growth becomes sustained and “the feel good factor” returns.  At some point we will realize that finally the recession is truly over.

The slow increase in budgets will create opportunities to purchase more expensive goods, initially products that represent cheapness rather than value for money will suffer most.

As our financial situation improves and negative factors decrease, we will look for symbols to represent a new era, both physically and mentally. Individuals will make long delayed high value purchases, and look to reward themselves. Companies will redecorate and rebrand. Novelty and freshness will help new companies move into stronger positions in the market, and weaken legacy products.


No matter when it ends the global recession will have a lasting mental effect on those that struggled to survive it. Expect to see a frugal mentality affecting individual and corporate decisions for many years. There will be a sustained desire to keep borrowing low and keep cash on hand.

At the end of the recession none of us will ever see our work, our relationships, or our lives, in quite the same way as we did before it changed our values. Most of us will just be hoping that the magic door to recovery opens as soon as possible and the good times return.   But understanding how our customers and suppliers now think remains as important as it did before the crisis hit. The 5 stages and the advantage that understanding each gives can be key to: recession survival, success, and maybe even more rapid growth during recovery.

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