Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

The authors of this book argue that traditional philosophies of economics are flawed because they assume that people rationally pursue their economic interests, which results in perfect and stable free market capitalism. The traditional views fail to address that people are also guided by noneconomic motivations and they might be irrational and misinformed. In other words, they ignore the animal spirits. The authors believe that our animal spirits affect economic decisions and help us answer questions such as why economies fall into depression, why people cannot find jobs, why real estate markets go through cycles, and why poverty persists for generations among disadvantaged minorities. I found this book interesting to read. - Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

This book boldly challenges the basic assumptions of macroeconomics, that rational expectations and efficient markets alone drive the economy. These theories fail to factor in "Animal spirits" in human beings. Fundamentally as a biological species, we are not programmed machines and our thoughts and emotions determine our actions. Human motives are not always driven by economic gains and similarly not all responses are rational. The combination of the two states of our motives, namely economic and noneconomic and the two types of our responses, namely rational and irrational leads to a framework of four situations of human activity in economies: - Economic motives and rational responses - Economic motives and irrational responses - Non economic motives and Irrational responses - Non economic motives and rational responses The authors assert that macroeconomics driven by mathematical models at best describes the first situation in the above list. Three of the other situations are completely are missed out in conventional macroeconomics argue the authors. Animal spirits is about the human factors of Confidence, Fairness, Corruption, Money illusion and Stories that are the key influencing factors that guide human actions in these three situations. What proportion of economic activity occurs in each of the four is not quantified. Suffice it to say that the three situations are significant and completely ignored in conventional frameworks. There is a chapter each to explain each of the five factors that describe animal spirits in the economic context. That explains wide swings in markets. In a way this book is a logical extension of Prof Shiller's "Irrational Exuberance" that correctly forecast the collapse of Dot coms and the housing bubble. This book further exposes the myth that housing and real estate prices are always bound to go up since there is not enough land and shelter on this planet for a growing population. I am inclined to link the concepts in Malcolm Gladwell's path breaking book "The Tipping Point" to the sudden growth in buying interest in a certain sector, housing for example, just as the phenomenon by which some fashions become suddenly popular, and then slowly die down. There is a peak for fashions and a peak for market madness when "snake oil" sells briskly. Tulip manias are a repeating phenomenon, causing wild swings in markets, never explained by classical economic theory based on rational expectations. The chapter that discusses tradeoff between inflation and unemployment is extremely interesting. Workers do not accept reduction in wages during a downward economic cycle due to "Money Illusion". Even employers consider that such a move would be considered "unfair" by employees. This "wage stickiness" leads to the inevitable job cuts that further depress the economy. Phillip's curve that attempts to explain trade-off between inflation and unemployment comes under close and critical examination. The role of the Governmen

Let's face it. There was nothing at all logical about the crazy stock market rally of the late '90s, especially in the NASDAQ. It didn't matter if some of these outfits weren't making money; they had enough hype to warrant their stock prices to rise, and the resulting "panic buy" scenario was ridiculous (hindsight is always 20-20). What occurred was a very natural human psychological reaction; I suppose you could label it "the bandwagon effect". People tend to base much of their decision making prowess based on what the masses are doing. "Well, if everybody's doing it, so will I!" This book is a gem, simply because it cuts through a lot of technical mumbo-jumbo and delivers a powerful message: The world revolves around "animal spirits", and we need to understand the ramifications. Certainly, human emotions dictate so much in our lives, and there's really no stopping the force. Throughout history, so many good and bad things happened because of human emotion being dialed into the equation. On the evil side, there was Adolph Hitler, swaying an entire nation into believing the Nazi way was the right way; the Ku Klux Klan is still going strong; and many large corporations, though not entirely evil, but nonetheless misguided, have made this country an economic mess. Essentially, recent studies have shown that humans are equipped with a unique propensity to respond to certain situations in a very consistent and predictable way. Understanding the human psychological needs would help us be a more productive society. Not everything can be measured quantitatively. Primal instincts are very real, and at times, have no correlation to any sort of cold, hard facts. Intagibles are a deciding factor in how we interact in society; having a better understanding of what drives us, psychologically is critical to succeeding in practically any endeavor imaginable; especially business.

Animal Spirits is a excellent book on what drives the economy and why. Fairness,corruption,money illusion and storytelling are the Animal Spirits that the authors believe lead to lack of confidence or over-confidence, which in turn leads to depressions or recoveries. Areas covered----the Federal Reserve. How and why the Fed raises or lowers interst rates and controls the money supply. Why Americans under-save for retirement. What caused the current credit crunch and housing problems. What causes the real estate markets to go through cycles. Animal Spirits is a good start for anyone wanting to understand the economy. The Secrets of Economic Indicators is another fine book that is a little more in-depth about the economy.

"Animal Spirits" is an important contribution to rethinking economic theory, particularly macroeconomic theory, so that it better takes account of human irrationality. The central argument of the book is that various human emotions - overconfidence, unwarranted pessimism, a sense of fairness, and stigma effects - can have important aggregate effects on the economy. Economists have often tended to overlook these factors, for several reasons: the irrational is difficult to model, and it has sometimes been assumed that these "irrationalities" will average out or be weeded out by the market. But Akerlof and Shiller argue that frequently such "animal spirits" can result in self-reinforcing cycles of either boom or bust. Irrationality is not only not tamed by the market, but can even be reinforced. Akerlof and Shiller consider varied topics in this book, including determinants of savings rates and wages, and high African-American poverty. However, most of the book focuses on how "animal spirits" might help better explain the business cycle. Their book is opportune, as the current downturn is plausibly explained as the result of the excesses of an unregulated speculative fever in housing and related investments. Their book includes a valuable postscript to one of the chapters that analyzes possible responses to the current financial crisis. I think this book is best suited to an audience that is reasonably well-aware of economic ideas about markets and the macroeconomy. This of course includes professional economists as well as many policy wonks interested in macroeconomic policy. It would also be a valuable corrective for a wider audience that holds the belief that the market is always in the aggregate efficient. This book supplies one more valuable argument for some government intervention in the market: the need for regulation to discourage various sorts of speculative bubbles.