Animal Spirit

MoneyBestPal Team
The human emotions that affect consumer confidence and financial decision-making in times of economic stress or uncertainty.

The famed British economist John Maynard Keynes used the phrase "animal spirits" in his 1936 book The General Theory of Employment, Interest, and Money. 

In times of economic stress or uncertainty, he used it to describe how human emotions impact consumer confidence and financial decision-making. He maintained that even when a rational appraisal of the circumstance indicated otherwise, people occasionally act foolishly, impulsively, or enthusiastically for a variety of reasons.

Animal spirits, in Keynes's words, are "an urge to action rather than inaction, and not as the result of a weighted average of quantitative rewards multiplied by quantitative probabilities." In other words, when faced with high degrees of risk or ambiguity, animal spirits are the psychological and emotional forces that motivate humans to act. They can also take into account the psychology of the market and the herd mentality, which can cause asset price bubbles or crashes.

Depending on whether they encourage or discourage consumption, investment, and innovation, animal spirits can have either beneficial or negative effects on the economy. People might feel more upbeat about the future, more willing to take chances, and more keen to spend money and make investments, for instance, when animal spirits are high. Economic expansion and innovation may be sparked by this. On the other hand, when animal spirits are low, individuals may experience a greater sense of pessimism, caution, and reluctance to spend and invest. Economic growth and innovation may be slowed as a result.

Some examples of animal spirits in action are:
  • The dot-com bubble of the late 1990s, when investors were overly optimistic about the potential of internet companies and drove their stock prices to unsustainable levels.
  • The global financial crisis of 2007-2009, when investors were overly pessimistic about the state of the economy and the financial system and panicked into selling their assets at fire-sale prices.
  • The cryptocurrency boom and bust of 2017-2018, when investors were driven by greed and fear to speculate on digital currencies with high volatility and uncertainty.
  • The COVID-19 pandemic of 2020-2021, when consumers and businesses faced unprecedented challenges and opportunities due to the health crisis and the lockdown measures.

As we can see, animal spirits have a significant influence on how the economy functions. They can produce instability and inefficiency, but they can also produce chances for development and innovation. Because of this, it is crucial for decision-makers, organizations, and people to comprehend how animal spirits function and how they can be influenced by a variety of elements, including knowledge, expectations, rewards, institutions, culture, and social norms.