Stress Hormone in Financial Crisis Slows Recovery

Research published recently in Proceedings of the National Academy of Sciences indicates that financial crises cause stress through an increase of the stress hormone cortisol (no surprise there), but also that cortisol significantly decreases risk-taking behaviors in those who are affected by it. While a decrease of risk-taking behavior might seem to be good, it actually has disastrous consequences on an economy.

During large scale financial recessions, a lack of risk taking could slow recovery. Investing is ultimately a risk-taking behavior. If investors shrink from risk, they will also shrink from investment and the overall economy will suffer. This could create a cycle of recession, as a lack of investment increases stress that contributes to an even greater lack of investment:

In fact individuals and companies tend to freeze up during crises, just when the markets offer the most attractive opportunities. During a financial crisis, the economy most needs risk takers but rising stress hormones contribute to the widespread risk aversion sometimes called irrational pessimism.

Keynes was right about one thing: Investment (spending) is good for a depressed economy. But investors are less likely to invest during a depression, so Keynesian economics has been adopted by the civil government to pick up the slack.

But does investment by the civil government have the same effect as investment by private entities? Of course not. The civil government has nothing to invest that it hasn’t taken from someone else by force. And when the civil government spends a lot, it actually makes private investment even less attractive.

There are, in fact, a lot of opportunities to thrive during a financial crisis. But our hormones and the Keynesian confusion of our civil government is stacked against us. That’s why we need leaders. People who are willing to take risks even when under stress. People who are willing to take responsibility for their own actions and for the well-being of others. We used to be a country that valued that kind of leadership. Where is that spirit now?