Is the economy good or bad? The psychology behind why people disagree

No one seems to agree where the American economy is headed. Are we teetering on the verge of a recession or are there brighter skies ahead? Our answer to this question has a big impact on our financial decisions, from how we invest our money to whether we buy a new house or car. It also influences how policymakers steer the economy and where business leaders focus company resources. 

When we look at the economy right now, we all see different things. My research tries to understand why. I’m a professor at University of North Carolina Kenan-Flagler Business School, studying how our brains process financial information and how this interacts with our lived experiences to shape our economic worldview. Understanding where our perspectives come from can help us step outside of our own bubble and see the economy more clearly.

Some of our differences in financial outlook are hardwired. Scientists estimate that genetics accounts for up to a third of our level of risk tolerance and a similar share of our overall optimism. When we look at economic news, we may be genetically predisposed to see it in a more positive or negative light or to think risky moves by government and business leaders are either savvy or shortsighted. 

But to really understand why we see the economy as we do, we have to look at how our brains process information about gains and losses. I’m a neuroeconomist, which means that some of my research involves putting people in fMRI scanners, which measure and map brain activity, and tracking activation in their brains while they make financial decisions. What I and other researchers have learned is that different areas of our brain are involved in processing positive and negative outcomes. 

When something bad happens and the loss areas of our brain are activated, we put more weight on each additional piece of bad news. In experiments in the U.S., Germany, and Romania, I asked participants to make hypothetical investment decisions and then exposed them to a string of either positive or negative results. As they started to adjust their expectations, the ones who had lost over and over became heavily pessimistic, much more so than was justified by the data, and more than the winning group tilted toward optimism.

The science suggests that our brains overcorrect after negative outcomes, creating a bias toward pessimism. This helps explain why bad economic news snowballs and why people’s expectations about the future stay gloomy even when reasons to be hopeful emerge. 

This bias toward pessimism can play out across an entire lifetime. Research shows that when people experience adversity, especially in childhood, the way their brains process information about gains and losses actually changes. They develop heightened neural sensitivity to the possibility of negative outcomes and decreased sensitivity to potential positive outcomes. Our lived experiences don’t just impact us on a psychological and intellectual level—they can also rewire our brains. 

My research shows how these differences shape our economic expectations. I found that people from lower-income backgrounds have more pessimistic predictions about what the payoffs of a stock are likely to be, even when given the same information as someone from a higher-income background. They are less likely to revise their beliefs when given good news about the stock and less likely to invest in the stock even when it is objectively better than other options. 

These differences in perception extend beyond our personal finances to our views about the economy as a whole. My research shows that those with higher earnings are more optimistic about the future of the overall economy. Meanwhile, people with lower incomes or more precarious finances feel greater uncertainty about where economic indicators like inflation and home prices are headed. While it may not seem surprising that those already doing well are hopeful about the future, it’s important to understand that this is partly rooted in the ways different people’s brains process the same set of economic information. 

For example, economists have long known that people from higher socioeconomic backgrounds are more likely to participate in the stock market and make investments like purchasing a home. My research shows that about 20% to 30% of this phenomenon isn’t due to differences in wealth or opportunity, but is simply because people from higher socioeconomic backgrounds are more optimistic about where the economy is headed. If we could inspire the same confidence in the future in people from lower socioeconomic backgrounds, it would help close this gap and get more people making investments that are objectively beneficial for them.

The more we understand the factors that shape our economic thinking, the easier it is to make smart financial decisions. When our economic expectations are biased, we miss out on promising opportunities. We take excessive risks, or not enough. We sit on the sidelines of the stock market or pass up the chance to buy a home.

We could all benefit from greater financial literacy. In addition to basic financial concepts like compounding interest, we need a sense of economic history—with all its ups and downs—and how our personal experiences, psychology, and even genetics shape our views. Rather than simply being reactionary and instinctual, understanding our biases can help us be proactive and grounded.

At a broader level, it’s important for policymakers and business leaders to take our differences in economic outlook into account when communicating with the public. If we hope that a government stimulus will spur consumer spending, different consumers may need different messages in order to feel comfortable parting with that money. If a corporate strategy is risky, some employees may need more reassurance than others that it’s a wise move despite the uncertainty. 

There’s a lot we can’t change about how we perceive the world. But understanding why we see the economy the way we do—our fears, our hopes, our desires—can help all of us make better financial decisions, no matter how uncertain the future may be.

Camelia Kuhnen is a professor of finance at University of North Carolina Kenan-Flagler Business School who specializes in neuroeconomics, behavioral finance, and corporate finance.