what are animal spirits 
 animal spirits is a term coined by the famous british economist john maynard keynes to describe how people arrive at financial decisions including buying and selling securities in times of economic stress or uncertainty in keynes s 1936 publication the general theory of employment interest and money1 he speaks of animal spirits as the human emotions that affect consumer confidence today animal spirits describe the psychological and emotional factors that drive investors to take action when faced with high levels of volatility in the capital markets the term comes from the latin spiritus animalis which means the breath that awakens the human mind in some ways keynes insights into human behavior predicted the rise of behavioral economics investopedia bailey marinerunderstanding animal spiritsthe technical concept of spiritus animalis can be traced as far back as 300 b c in the fields of human anatomy and medical physiology there animal spirits applied to the fluid or spirit present in sensory activities and nerve endings in the brain that resulting in mass psychological phenomena like manias or hysterias animal spirits also appeared in literary culture where they referred to states of physical courage gaiety and exuberance the literary meaning implies that animal spirits can be high or low depending on an individual s degree of health and energy animal spirits in finance and economicstoday in finance the term animal spirits arise in market psychology and behavioral economics animal spirits represent the emotions of confidence hope fear and pessimism that can affect financial decision making which in turn can fuel or hamper economic growth if spirits are low then confidence levels will be low which will drive down a promising market even if the market or economy fundamentals are strong likewise if spirits are high confidence among participants in the economy will be high and market prices will soar animal spirits can give rise to bubbles in asset prices and also can lead to panic selling according to the theory behind animal spirits the decisions of business leaders are based on intuition and the behavior of their competitors rather than on solid analysis keynes understood that in times of economic upheaval irrational thoughts might influence people as they pursue their financial self interests keynes further posited in the general theory that trying to estimate the future yield of various industries companies or activities using general knowledge and available insight amounts to little and sometimes to nothing he proposed that the only way people can make decisions in an uncertain environment is if animal spirits guide them in 2009 the term animal spirits returned to popularity when two economists george a akerlof nobel laureate and professor of economics at university of california and robert j shiller professor of economics at yale university published their book animal spirits how human psychology drives the economy and why it matters for global capitalism2 here the authors argue that although animal spirits are important it is equally important that the government actively intervene to control them via economic policymaking when necessary otherwise the authors postulate the spirits might follow their own devices that is capitalism could get out of hand and result in the kind of overindulgence that we saw in the 2008 financial crisis the five cognitive and psychological types of animal spirits identified by akerlof and shiller include following these phenomena help economists consider answers to tricky questions such as why do economies fall into depression and why are financial prices and corporate investments so volatile examples of animal spirits in actionanimal spirits often manifest as market psychology defined by either fear or greed for the latter the term irrational exuberance has been used to describe investor enthusiasm that drives asset prices far higher than those assets fundamentals justify simply tacking on dotcom to the name of a company increased its market value to extraordinary levels with startups showing zero earnings commanding ever higher share prices the crash that followed saw the nasdaq index which had risen five fold between 1995 and 2000 tumble from a peak of 5 048 62 on march 10 2000 to 1 139 90 on oct 4 2002 a 76 81 fall by the end of 2001 most dot com stocks had gone bust another example was the lead up to the 2008 09 financial crisis and the great recession when the markets were rife with financial innovations creative use of both new and existing financial products like collateralized debt obligations cdos abounded particularly in the housing market initially this trend was thought to be positive that is until the new financial instruments were found to be deceptive and fraudulent at this point investor confidence plummeted a sell off ensued and the markets plunged a clear case of animal spirits run amok critiques of animal spirits animal spirits refers to the tendency for investment prices to rise and fall based on human emotion rather than intrinsic value this theory however has been critiqued by some economists who argue that markets are nonetheless efficient and that individual irrationality washes out in the aggregate the animal spirits thesis like behavioral economics essentially throws a monkey wrench into the assumptions of efficiency and rationality other critics argue that bubbles are not the result of mass psychology but are due to the over involvement of central banks and too much regulation which stymie economic growth and throw markets out of equilibrium these arguments often stem from austrian economic theory or libertarianism that asserts that large increases in the money supply printed by governments are the cause of bubbles and their ultimate demise by encouraging malinvestment the bottom lineanimal spirits is a concept developed by economist john maynard keynes to describe the human emotions that affect consumer confidence these account for market psychology and in particular the role of emotion and herd mentality in investing this upends the assumptions of rationality and efficiency and primary drivers of economic behavior 