Laura Rowley Money & Happiness

One of the keys to surviving the economic crisis, at least from a psychological perspective, is recognizing what you can and can't control. And not doing destructive things while you're powerless.

Asserting Control

In 1950s, psychologist Julian Rotter developed a concept called "locus of control." Contrary to Freud's notion that human beings are a simmering stew of unconscious drives, Rotter argued that personality is a function of interaction with the environment. Depending on how their efforts have been received in the past, people develop an internal locus of control -- a belief that success or failure comes from their own efforts -- or an external locus of control -- a belief that luck, chance, or other people largely determine outcomes.

People can move along the internal-external continuum depending on the situation. Rotter's work became highly influential in education, medicine, and economics. Studies in the 1970s, for example, found that giving hospital patients and nursing home residents a stronger sense of control resulted in better health outcomes.

How we choose to deal with the powerlessness wrought by the economic crisis is not trivial, given the mounting number of related suicides. I tracked down Rotter, 94, who's a professor emeritus at the University of Connecticut, to find out which locus of control can help people cope with the current mess.

Inside/Outside

"It depends," he said. "People who are more internal tend to blame themselves because they think they had control over what happened. People who are external think it's all chance or luck anyway and are more likely to shrug it off."

On the other hand, he adds, "A lot depends on how they classify the event beforehand;

a lot of people are internal but realize to begin with that they don't have any control over the stock market. It also depends on whether they chose the stocks themselves or an investment company did the choosing for them. [In the latter case] they're more likely to realize there's more chance involved than they thought."

Similarly, someone who gets laid off can blame their own performance, or view himself as an unlucky fatality in an economic storm. "People who are more internal work out a strategy to prevent it from happening the next time," says Rotter. "The internal [person] is always more likely to try to do something to fix it. But not everything in the world can be controlled by individual people."

Status for Sale

And there's the rub -- a feeling of powerlessness can trigger irrational responses that exacerbate financial problems. A paper published earlier this year in the Journal of Consumer Spending, for example, found that a state of powerlessness increased consumers' willingness to pay for status-related products.

"Low power is an aversive state marked by a lack of control," says Derek Rucker, co-author with Adam Galinsky, both of Northwestern University's Kellogg School of Management, of a study on powerlessness and consumerism in the Journal of Consumer Research. "If I have more of something than others, that's one thing I can use to compensate for being powerless -- I can acquire status."

Study respondents were asked to write about a time when they felt powerful or powerless. Afterward, they participated in an online auction that included high-status goods such as a fur coat and a silk tie. "For products with low or no association with status, there was no difference in the reservation price for those who had power or those with no power," says Rucker. "But for products associated with status, those who recalled they didn't have power indicated they were willing to pay more for them."

Paths to Power

Rucker says when it's difficult or impossible to directly confront the issue that's causing powerlessness, "a consumption decision becomes one means of fulfilling that need for power. At least for some individuals it could create a cyclical downward spiral."

To wit: I recently heard a story of a man who, shortly after his layoff, decided to add a third floor to his home. Similarly, a friend who lost money in the market told me she has been spending more than she did before the loss, on expensive furniture and the like.

Rucker says the spiral can be avoided simply by being aware of the phenomenon: "Alerting them to the behavior may be enough to change it. You can think about why it is you want this product -- is it because you're feeling powerless? Are there ways to circumvent this through more positive means -- means that don't have disastrous outcomes for spending?"

Out of Control

Another reaction to powerlessness is seeing patterns and connections that don't exist, leading to poor judgment, according to research published in Science by Galinsky and Jennifer Whitson, an assistant professor at the Macomb School of Business at the University of Texas, Austin.

Subjects were presented with a series of "snowy" pictures, some containing images and others random dots. People who felt they lacked control more often perceived images in the latter. In another experiment, some participants were told the stock market was currently a volatile minefield and others that it was calm and predictable. Then both were presented with an equal amount of positive and negative information about a company, and asked whether they would invest.

Those primed to feel powerless by volatility "were more likely to make strong conclusions about [investing] that were unwarranted," says Whitson. "Those who chose not to invest remembered more negative phrases than they had seen."

Restoring the Power

Researchers found that reminding people of their core values reversed the effect. Before their experiments, Galinsky and Whitson asked participants to rank by importance a list of six values, such as knowledge and connection with others. At the end of the experiment, participants were given questionnaires and asked to write about either their most or least important value.

"Among those who got chance to affirm something central to their identity, their perceptions of patterns returned to normal -- whereas those who did not get a chance to affirm values still saw patterns that were not there," says Whitson.

"My gut tells me that when people knew they could control what they thought was important in their lives, it returned to them that sense of ‘the world might be crazy but I know what's important,'" she adds. "No matter how out of control the world is, the one thing we always have control of is what we decide to care about."

Survival Through Reinforcement

Rucker agrees, adding that a sense of power can be restored by having a close friend affirm what they value about you: "It's not enough to think to yourself why you're good -- you need others pouring in support for you."

Financially speaking, it helps to be conscious of what you can control: managing spending, boosting income by moonlighting or selling goods on eBay, evaluating how much risk you're really comfortable with, and reducing investment fees. Then set achievable goals. For instance, the Standard & Poor's 500 Index fell about 40 percent in 2008, wreaking havoc with college and retirement portfolios. Figuring out how to save more in 2009 -- rather than day-trading in hopes of rebounding from losses -- is a more rational response that will help restore a sense of control.

Finally, try to put financial problems in historical perspective, Rotter suggests. "I've lived a long time and there were extraordinary events going on all through my life -- starting way back in the Depression," says Rotter, who was in his 20s at the time. "For a lot of people, that was far more crushing than this recession. You had to react by figuring out ways to survive through [your] own efforts -- and that's very strong reinforcement. It had that effect, at least, on me."