Dr. Richard Ackley, Professor of Psychology and Program Director, Business Psychology

We are scaling a face of economic change not confronted since the Great Depression. We are framing this as a recovery. But usually a recovery uses optimism as the lubricant for change. Here a lingering, devastating resignation has settled over the nation. Each day it is reinforced with news about how dark things are: Unemployment rising, foreclosures increasing, banks collapsing, and the stock market limping; problems escalating and no clear answers apparent. The din of pessimism is not an unnatural reaction.

The president of the United States talks of hope. I’ll suggest that hope enables. Hope is the reason that people buy lottery tickets. Hope isn’t always our ally. What we need is confidence. Confidence liberates. Hope is based on loss; it is the last grasp when all else has failed. Confidence is based on experience. ‘I’ve not handled this before but I have handled something close. Let me use those skills in this situation.’ It stems from understanding the connection between efforts and rewards: The stronger the connection, the more confident the person; the weaker the connection, the less confident the person. Eventually, learned helplessness can occur. And this has a catastrophic effect as people give up. Energy is depleted and productive effort vanishes. It is not that people do not do anything. But the efforts tend toward escape and other deflective behavior, even alcohol and drugs. We see progress evaporate as learning is inhibited. For only when we witness a connection between behavior and consequences can we learn from events.

The stimulus package is based on getting money to people, but it may not be effective in restoring a renewed sense of confidence. People who performed poorly receive things they have not earned. They will not acquire a stronger connection between their actions and their payoffs, which is the hallmark of personal responsibility. What we’re seeing here is a case of quick-fix solutions that may be seen as practical today, but are they prudent in the long term?

This also applies to corporations getting TARP money or bailout funds. They have failed. Even if we continue to give General Motors money, its leadership may know what they’ve done wrong, but they still don’t know what to do right. Giving money alone won’t improve learning. Again, the question of practicality over prudence applies.

Rewards, fairness, and motivation need to be balanced. There are hidden costs of rewards without equilibrium. With bailouts and stimulus packages, people look at what they contribute and what they derive. When they evaluate this comparison, three outcomes are possible: 1. The two ratios are even, meaning fairness is experienced. 2. One party views his or her ratio less than the others, meaning under-reward is felt. 3. One party views his or her ratio as greater than the other, meaning over-reward is felt. Each of the last two scenarios produces tension.

If there is over-reward between equals, the resulting feeling is often guilt. An example, think about Valentine’s Day. You give a box of candy and your significant other gives you a Rolex watch. What do you experience? For many, I suggest guilt. What would you do outside of giving the watch back? You will try to increase your contributions, perhaps act more friendly, pay for more meals, do more work, etc.

Now, if there is an under-reward, a more complicated state occurs. You gave the watch and got the candy. What happens? For many, a feeling of disappointment and anger occurs. Here you have two options: Expect a more positive reward next time or harbor a lingering feeling of resentment, which for some can lead to negative behavior that you feel is justified by being under-rewarded.

Let’s say, we call one party AIG and we call the other party homeowners. Here, it’s the insurance player who gets bailouts and is over-rewarded. Meanwhile, average Americans feel increasingly under-rewarded as they lose their houses and jobs. AIG is not going to give the money back. In fact, it asks for more and feels deserving of $165 million in bonuses.

So we have guilt that is transformed into arrogance and anger that turns into attack and recrimination. We are identifying villains and victims. But nobody feels responsible. Recovery is based on accepting responsibility. In the end, actions such as bailouts do the opposite of restoring our confidence; they deter long-term trust in our government and financial sectors, two economic players that need the support of the public.

In business consulting psychology, we help leaders execute large-scale change. We have found that project managers are good at developing solid solutions to technical problems, then their implementation often disappoints. It seems that ‘being right’ and ‘being heard’ are two different things. Being right is in the plan; being heard is in the message and its reinforcement. Research indicates that conservatively 60 percent of change strategies fail. For example, we don’t have to look further than our stimulus efforts: the Obama administration is pouring money into a banking system that does not change the lending behavior of banks; or the Bush approach to distribute money to people who did not spend it. The lesson is: As obvious as the ways to use incentives to change behavior appear, there are hidden costs to rewards. Unless the pull of behavioral economics and social psychology is accounted for, errant public policy, even awry business strategies, will continue to undermine our impact and our confidence.