Animal Spirits – How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism

Citation

Dent, P. (2010), "Animal Spirits – How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism", Journal of Property Investment & Finance, Vol. 28 No. 4, pp. 312-313. https://doi.org/10.1108/jpif.2010.28.4.312.6

Animal spirits is an economic term which, according to the authors, refers to a restless and inconsistent element in the economy. This book is therefore concerned with the psychological aspects of the economy and human behaviour in decision making. The term was first used by John Maynard Keynes in The General Theory of Employment, Interest and Money (1936), when describing emotional influences on human behaviour. Animal spirits offer some explanation as to why we get into recessions. But, more than that, for, by incorporating them into decision making, they can help us to understand what policies to pursue through crises like the current one.

Akerlof himself has, over the last 30 years, been at the forefront of redefining economics which, in his words, relies more on careful empirical observation, and less on the questionable assumption regarding how rational people must behave. For his part, Shiller was the man who foresaw the economic crisis that would come from the real estate boom. His publications Irrational Exuberance and The Subprime Solution have become important texts in helping to unravel the consequences of the recent economic crisis. This book, Animal Spirits, therefore promises much and is a welcome addition to the growing need for awareness of human factors in global financial markets.

The 176 pages of text are split into two main parts, topped and tailed by introduction and conclusion. Part One introduces the reader to the Animal Spirits which are the subject of the book. Five different aspects are described and their effects on economic decisions are exposed:

1. 1.

   confidence, implying behaviour that goes beyond a rational approach to decision making;

2. 2.

   fairness, suggesting that decisions are taken within a set of norms or rules of behaviour;

3. 3.

   corruption and bad faith, concerning issues of antisocial behaviour;

4. 4.

   money illusion, relating to nominal values rather than relative values as influencers in decision making; and

5. 5.

   stories and the part that narratives play in decision making – without stories life could be just “one damn thing after another”.

Each is the subject of a chapter. The examination of these is both scholarly and accessible. There are plenty of anecdotes and insights to complement the more robust conclusions and all is written in a style which draws the reader in. It is a genuine good read which manages to take a weighty and disturbing subject and humanise it. Economies around the world are so interlinked in the twenty‐first century that the individual may feel that she/he has no power or influence anymore. The authors have succeeded here in inviting us all to think differently about the decisions that led up to such events as the current crisis.

Part Two of the book then goes on to examine the effects in more detail using eight questions ranging from the power of central bankers to the cyclical nature of the real estate markets. The authors are, naturally, concerned with the current financial crisis and they believe that the standard remedy (take two aspirin and get some rest) will not be the answer this time! The complexity of “new finance” requires greater (both broader and deeper) understanding if workable long term solutions are to be found.

Their solution? Well, put simply, it incorporates animal spirits into rational models and efficient market analysis. Read the book to see how you might do that! Animal spirits as an economic term relates to consumer or business confidence. But it means more than that. The concept refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. The trust in our mortgage and housing markets that drove real‐estate prices to unsustainable heights is one of the most dramatic examples of unbridled animal spirits we have seen in modern times.

I can certainly recommend it as one that opens up a range of opportunities and offers a positive note to the current gloomy economic forecasts.