Human nature makes bad economy worse.

How much of this economic crisis we’re in is real, and how much of it is in our heads? And can you really separate the two aspects?

Most of the industrialized and near-industrialized world is living in an environment of depleted stock-market wealth, slower economic growth -if not outright contraction -and/or shrinking real estate values.

It’s hard to pinpoint how much of this economic meltdown is based on tangible factors versus people’s perceptions of the situation, says Jamie Gruman, an assistant professor of organizational behaviour at the University of Guelph in southern Ontario. However, he says the latter definitely exacerbates the former when you consider the actions of stock investors and consumers when they get wind of economic trouble.

"People’s ideas are influenced by the stories they’re hearing," he says.

Warren Thorngate, a professor of social psychology at Carleton University in Ottawa, says most people in his profession would say at least half of what happens in an economic downturn is psychologically based – and some would say it all is.

Thorngate says what’s happened on the stock market is an example of "group phenomenon," where people’s reactions are largely based on what others around them are doing. He says its almost like someone yelling "fire" in a crowded theatre and, as a result, people panic because like everyone else, and they rush for the doors. Unfortunately, the ensuing chaos leads to fewer people escaping with their lives.

"If you’re looking at me to see if I’m rushing to something, and I’m looking at you, as soon as one of us starts rushing, the other one’s going to do it," Thorngate says. "And that will mean that two people will be doing it, and then other people around us will look at us and say, `There must be something wrong,’ and they’ll start rushing. And pretty soon you have a chain reaction."

Ashesh Mukherjee, a professor specializing in consumer psychology at McGill University’s Desautels Faculty of Management in Montreal, says the current economic crisis can be blamed on a combination of irrational human behaviour and a lack of regulation to keep it in check.

Mukherjee says people often make economic rough patches worse by their reactions. Citing the sell-off on stock markets since September, Mukherjee says this was driven by fear and goes against reason -since the vast majority of equities will make major gains from their current low levels. But, predictably, panic selling leads to greater stock-market losses in the short-term.

"From the stock-market point of view, people magnify their own losses (by selling)," Mukherjee says.

He adds that mass reductions of consumer spending in response to economic problems are also unwarranted, and this too has undesired consequences for the economy.

Several surveys showed Canadian consumers planning to spend less on holiday shopping this year. One report by Ipsos Reid explicitly linked an increase in frugality with people "becoming nervous in their place of employment."

But consider, even if the unemployment rate in Canada would move from its current level of 6.3 per cent to 8.4 per cent – which a recent TD Bank forecast says will happen by 2010 – those extra bodies without jobs represent less than 400,000 people out of a labour force of more than 18 million – or about one in 50. So even in tough economic times like now, the chance of any given person losing their job is low.

"We have a tendency to over-generalize in life," Mukherjee says. "The mind is designed to take a statement and generalize it as far as possible so we can make decisions quickly, even though they’re not the best decisions."

It’s worth noting that for all the talk of recession, there is no statistical proof yet that Canada has entered one, notwithstanding a growing consensus among experts and even governments that one has begun.

Glen Hodgson, chief economist for the Conference Board of Canada, recently discussed the "psychology of recession" in a report. He noted how in the latter part of 2008, the word "recession" has been used unsparingly in media reports as economic uncertainty mounted.

In an interview, Hodgson says this kind of coverage causes consumers to react to a recession that has not yet happened, consequentially increasing the chances of it occurring.

"People start to get worried," he says. "They start to change their behaviour. Their behaviour makes things worse. They get worried even further, and it goes on and on and on."

The Conference Board of Canada’s measure of consumer confidence has reached a depth not seen since the severe recession of 1982. Hodgson admits that by publicizing this negativity, "we might even be part of the problem. We keep telling people that they feel bad, and therefore, they feel bad."

Hodgson notes that Canada has recently gone through an unusually long period of economic expansion, with the last confirmed recession occurring in the early 1990s. People are reacting more strongly now to the prospect of a recession than they did when it was a more regular occurrence, generally happening at least once every 10 years, he says.

Hodgson notes that for many Canadians, a recession now would be their first experienced as an adult.

"In a state of uncertainty, I suspect that we’re overdramatizing things," he says. "We’re magnifying the risks of something bad happening to us personally.

"People tend to fear what they don’t know. A lot of the under-40s have never been through this as adults. . . . They may have heard about (past recessions) on the news or at the kitchen table. But for them, they were still going to school and buying chewing gum and chasing girls, all the usual good stuff you’re supposed to do in high school."

Dr. Toni Galardi, a Los Angeles-based psychotherapist and author, has a different take on the psychologically significant elements of this economic downturn.

She says how badly it impacts any given individual depends largely on how they view it. She argues that what is lost by people in such times might not be as grave as they anticipate. While certain material comforts or luxuries fall out of reach, Galardi says it can be a chance for people to refocus on the things that really matter.

"We can see this as depravation – `I don’t get to have the latest video games on the market, the latest cellphone, the latest-version car, or whatever,"’ she says. "Or, you can see it as, `I’m getting back to my essential nature. There’s an opportunity for me to look at what I really need to be happy, and how much of what I thought I needed was really chasing something that . . . was not bringing me happiness, necessarily."’