Animal Spirits

In an intriguing new book, Animal Spirits: How Human Psychology Drives the Economy, US economists George Akerlof and Robert Shiller argue that psychology plays a far bigger role in determining economic outcomes than economists realise–and that, broadly speaking, people get what they expect.

If we think good times are ahead, we act confidently in a way that creates them. And if we expect a downturn ahead, we act defensively and unwittingly ensure that’s what we get.

Animal spirits, a term coined by economist John Maynard Keynes, refers to a sense of consumer trust and confidence, Shiller said. The term also suggests an awareness of fairness, corruption and faith.

Shiller, whose book, was published in February, argues that the current economy is suffering from a suppression of animal spirits. On an individual level, consumers may feel that they are making a rational choice not to spend money, he noted. Collectively, however, such decisions communicate a lack of trust in the economy. “Emotion is contagious among people,” Shiller said.

Shiller argued that these animal spirits played a role in the collapse of the housing market. The media featured many human interest stories suggesting real estate was a get-rich-quick industry. “Stories or narratives about the economy are like thought-viruses that spread through the economy — a contagion,” Shiller said.

The excitement in the housing market encouraged banks to lower their lending standards, resulting in the subprime mortgage crisis. “Boom periods tend to show a rise in corruption and a decline in good faith in business,” Shiller said. “In an atmosphere of a boom, people feel like they can bend the rules and (get away with) bad behavior.”

Animal spirits and the blending of economics and psychology haven’t been well studied, Shiller said. But Shiller hopes his book will encourage economists and other academics to recognise this phenomenon and develop research around it.

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