Per Tardi (2025), animal spirits are the psychological and emotional states (confidence, hope, fear, pessimism) that arise during economic uncertainty which drive people’s money decisions (investing, saving, consumption). This can lead to “irrational exuberance”, whereby the decisions of businesses or consumers are based on emotion rather than on solid analysis, and can go to extreme levels, as seen during the 2008 financial crisis. Spirits have a big influence over economic growth, for example, low spirits can lead to a fall in investment, demand, and income.
How Uncertainty Is Created
Uncertainty is created when expectations, theory and reality misalign. (Scanlon)
Origins of the Term
The term animal spirits was coined by economist John Maynard Keynes. He put forward in The General Theory that trying to estimate the future yield of various industries, companies or activities is pointless, as the only way people make decisions in an uncertain environment is if animal spirits guide them. (Tardi)
A modern perspective on Animal Spirits
As explained by Tardi (2021), G. Akerlof and R Shiller both published a book- a modern take on animal spirits, and made it clear that government intervention is important, and if policymakers think otherwise “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 two economists identified five cognitive and psychological types of animal spirits. These ‘phenomena’ help economists answer questions such as “why do economies fall into depression” and why financial prices are so volatile.
- Confidence
- Corruption (fraudulent conduct by those in power)
- Money Illusion (viewing money in nominal terms, and not inflation adjusted, real terms (Liberto))
- Fairness
- Stories (news, for example)
Critics of Animal Spirits
Some critics say that in aggregate, “individual irrationality washes out.” Continuing, they say bubbles are the outcome of central bank action and regulation, not mass psychology which ‘disrupt growth and market balance.’
Works Cited:
Tardi, Carla. “Don’t Let Your Animal Spirits Influence Your Important Decisions.” Investopedia, 24 May 2021, www.investopedia.com/terms/a/animal-spirits.asp.
Scanlon, Kyla. In This Economy? Crown Currency, 28 May 2024.
Liberto, Daniel. “Money Illusion Definition.” Investopedia, 26 Oct. 2021, www.investopedia.com/terms/m/money_illusion.asp.
