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With the release of Alpha 5, loyalty was removed from the game. See mood for the current system.
Happiness was one of two factors (the other being fear) in determining a colonist's loyalty. Happiness was sustained by fulfilling physical and psychological needs. It changed gradually over time to rest at a point determined by the thoughts the colonist was having.
Fear used to be one of the two ways (the other being happiness) to maintain the loyalty of colonists. Fear represented how intimidated someone is by their environment. It rose when someone witnessed threats, brutality, and displays of power.
Certain items were specifically designed to induce fear: