Mood and Economy: Why Your Happiness Matters

Oct. 16, 2009— -- Melody Warnick feels good. After the stock market crashed last year, the Iowa writer began pouring money into the stock market, bulking up her retirement accounts and buying shares in Apple and Yahoo.

"My husband and I have been pretty dang optimistic throughout the recession," said Warnick, 33, a mother of two children who has since seen her investments jump more than 30 percent. "I'm a bargain-hunter, so when stock prices dropped, I thought, 'It's a sale.'"

The economy would be much better off if more Americans were equally positive, economists say. They are closely watching for signs of optimism among the nation's consumers and hoping that some of it will rub off on others, and translate into more spending.

"People are very much affected by the mood of the moment," said Robert H. Frank, a professor of behavioral economics at Cornell University in Ithaca, N.Y. "When some people start buying, others think they must know what they're doing so they go along with it."

The domino effect may have already begun, economists say. The Dow Jones industrial average is up 15 percent this year and crossed the symbolically important 10,000 mark this week. Home prices have stabilized, and in September, furniture sales rose for the first time in a year and half.

Even consumer sentiment has improved. An ABC poll released this week showed that a growing segment of the population believes the U.S. economy is headed for better times. The only indicator bucking the trend is unemployment, which keeps rising and makes some people wonder whether the recovery can continue.

The recovery is fueled in part by attitudes: There's no doubt that finance and psychology are closely tied. Studies show that the mere act of spending money releases dopamine, a hormone -- also released during gambling and sex -- that triggers feelings of energy and euphoria.

Financial troubles, meanwhile, make people anxious, depressed and cause them to lose sleep. In the middle of the recession earlier this year, scientists found that one-third of Americans were losing sleep over the state of the economy.

Economic Pessimism May Be Contagious

"It's a primal instinct," said Alan Lysaght, author of the "ABCs of Making Money."

"When people see their stocks go down or the economy take a nosedive, they worry about whether they'll be able to provide for themselves and their families."

Some experts argue that pessimism about the economy is contagious, and that people might become financially stressed even if their underlying conditions don't justify it.

"The unfortunate thing is that consumer sentiment tends to exacerbate negativity in a downturn," Cornell's Frank said. "When things start going badly for people, even those who aren't affected worry about losing their job and they rein in their spending."

As a result, politicians and CEOs of large companies try to inspire confidence during times of crisis in an attempt to convince consumers to spend more money. Indeed, the pursuit of cheer has become so vital that economists are trying to measure America's happiness as an indicator of its economic success.

Some people, however, complain about such compulsive desire to stay cheerful. Barbara Ehrenreich, the best-selling author of "Bright-Sided," argues that the never-ending promotion of positivism helped cause the economic downturn and is making us unrealistically greedy.

"Consumer culture encourages individuals to want more -- cars, larger homes, television sets, cell phones, gadgets of all kinds -- and positive thinking is ready at hand to tell them they deserve more and can have it if they really want it," she writes in her book.

More importantly, focusing on the bright side allowed Americans to miss the warning signs of the housing bubble: Corporate executives who tried to warn others about the impending crisis were fired by rosy-eyed CEOs.

Wall Street Gamesmanship at Work?

Remember the champagne bottles that traders popped on the NYSE floor when the Dow hit 10,000 10 years ago? That's the kind of optimism that experts such as Ehrenreich rail against.

Stan Brownell, a marketing representative from New Jersey who lost his job as a financial adviser this year, said the push to cheer up Americans is simply in Wall Street's self-interest.

"It's pure gamesmanship," he said. "The only bright side I see is that not as many people are losing their jobs as before."