CNBC Explains

Hysteresis: CNBC Explains

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Hysteresis may sound like a blue mint mouthwash or even a tropical disease -- and in fact, the word does have its beginnings in science.

However, over the years, it's come to have an economic meaning, as CNBC explains.

What is hysteresis?

The word was coined from Greek origins by Sir James Alfred Ewing, a Scottish physicist and engineer (1855-1935), and refers to systems, organisms that have "memory," or retain certain characteristics.

But when it comes to finances, hysteresis is used to describe a shock to an economic system with little chance of a recovery.

Here's an often-used example of unemployment. As an economy falters and unemployment increases, more people adjust to a lower standard of living. As they become accustomed to the lower standard of living, they may not be as motivated to make enough money to get back to the previously higher standard of living.

Also, as more people become unemployed, the hysteresis deepens, as it becomes more socially acceptable to be, or remain, out of work.

And even after the labor market returns to normal, some unemployed people may still be disinterested in returning to work, because they have gotten used to not having a job. That, too, can be describe as hysteresis.