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

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The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.

248 pages, Hardcover

First published January 1, 2008

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About the author

George A. Akerlof

22 books130 followers
George A. Akerlof is a Professor of Economics at the University of California, Berkeley, and 2001 Nobel Laureate in Economics.

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Displaying 1 - 30 of 215 reviews
May 26, 2019
An excellent read on how economics gets to be irrational.

Confidence and its multipliers
Special poverty of minorities
Inflation-unemployment trade-offing
Depression of economies
Cenral banking and its powers
Money illusion
Corruption and bad faith

Dated at the moment? Yes, a bit.
Still, this was a trailblazer at some time and it's still a worthy read since these trends aren't going away any time soon.
Profile Image for Trevor.
1,294 reviews21.7k followers
May 22, 2017
Part of the reason why I found this book quite so interesting was because I’ve read lots of books about behavioural economics over the years, but they are much more interested in psychology than they are in economics. For instance, a book that I am constantly recommending and even buying for people is ‘Predictably Irrational’ – and it proudly refers to itself as being one set in behavioural economics, but really, you sort of have to squint to see the connection to economics most of the time. Now, don’t get me wrong – I’ve really enjoyed those books, but what this one does is to place behavioural economics squarely in the realm of economics. This is also, effectively, a re-introduction to Keynesian economics, a view of economics that went out of favour with Milton Freedman and Ronald Reagan – the consequences of which we are living with today.

One of the authors here has a Nobel prize in economics – that is, these aren’t just ‘some guys’ with a ‘new idea’ about economics, but people from inside concerned with the overall direction that economics has taken.

The book comes in two parts – part one is about the various ‘animal spirits’ that direct the ways in which we think about and act within the economy. The reason why we need to think about animal spirits is that economics is too often presented as if everyone was the fabled ‘economically rational human’ – that we are all constantly considering the costs and benefits of our actions and purchases and that we only make a purchase when we know that is the best way to dispose of our money. Such an idea is so stupid it is surprising it was ever accepted as the basis of any subject that seeks to describe itself as a ‘science’. The idea that unemployment is working people taking a kind of holiday is equally laughable, even if it does mean that believing such allows right-wing types can feel justified in cutting unemployment benefits from people so as to give them an incentive to find a job.

Animal spirits relate to some of the predictably irrational (if irrational they really are) ways humans set about engaging with the economy. For example, the authors make the point that people want to believe that their wages are ‘fair’. They want to believe that what they are earning reflects their worth – and they don’t want to see some other people be rewarded well beyond what they also deem as being fair. This feeds into one of the other animal spirit ideas – that is, that we need to trust the system, that there will be no corruption undermining the system while we are making investments in that system. A quick look back at 2008 and what has happened since shows that our current system runs afoul of both of those precepts. People’s wages have stagnated for decades despite massive increases in productivity – and those at the very top have reaped undreamt of rewards, often despite their actions rather than because of them. An instance are the ‘retention bonuses’ that bankers gave themselves after the GFC, often out of the taxpayer funded rescue packages, despite these same bankers having nearly crashed the world economy. Given all this, it does make it hard not to think that the system is rigged.

The second part of the book focuses on eight questions that can’t really be answered with conventional economic theory in ways that don’t sound a little stupid, but which make much better sense when animal spirits are evoked. I’m just going to list these:

Why Do Economies Fall into Depression?
Why Do Central Bankers Have Power over the Economy?
Why Are There People Who Cannot Find a Job?
Why Is There a Trade-off between Inflation and Unemployment in the Long Run?
Why Is Saving for the Future So Arbitrary?
Why Are Financial Prices and Corporate Investments So Volatile?
Why Do Real Estate Markets Go through Cycles?
Why Is There Special Poverty among Minorities?

One of the things about economics is that it seems impossible to predict the future, which is annoying, since it does seem that virtually the whole of economics is set up to do exactly that. All the same, and as a case in point, in Australia we appear to be on the cusp of a housing collapse – something we avoided while the rest of the world was engaged in one and which we have been told for a decade is impossible to happen here because, unlike elsewhere, the fundamentals of our economy are sound and Australia has very special circumstances that made such a collapse imposssible. Now, that might even be true – but I’ve a feeling it is not. One of the main reasons for this feeling of mine is that ‘this is a special time and place and that is why the bubble will not burst this time’ is exactly the logic that has driven EVERY bubble. That every bubble that has ever existed has eventually popped is not proof that this one will have to pop, of course, but I still wouldn’t ‘bet my house on it’ so to speak.

What drives bubbles to pop has much less to do with the objective conditions that make looking at bubbles encourage you to want to put your hands over your eyes. It is much more about when people ‘feel it in their waters’ that the rout is on. It is these changes in belief and then the difficulty in changing those ‘once bitten, twice shy’ feelings back again that relate directly to animal spirits and that have a direct impact on the future growth in the economy. It is for this reason that the authors recommend re-regulation of the economy – as providing some sense of the system being far and not rigged is an important first step to giving people their belief back in the system, and without that belief, the system basically collapses.

Like I said, this is behavioural economics directly related to the economy at large and it makes for fascinating reading.

There were a couple of times during this when I was stopped in my tracks out of amusement and that feeling of ‘how can I not of heard of this before?’ For instance, I had no idea ‘The Wizard of Oz’ was a kind of allegory on the economy – the authors say, “The yellow brick road and Dorothy’s magical silver slippers (replaced for the 1939 movie with ruby slippers since these showed up more dramatically on color film) were metaphors for the intense conflict over the gold standard and the proposed free coinage of silver. The little people, the munchkins, represented the poor working class. The wicked witch stood for the selfish business interests. The wizard himself was the great deceiver, the U.S. president.” (page64)

Or what about this? “The nursery rhyme about Humpty Dumpty originated before children’s illustrated storybooks were common. It was a riddle. Who was Humpty Dumpty? He was an egg.” (page 90)

This was an interesting book – one I suspect I will think about more over the next few months.
Profile Image for Gordon.
212 reviews43 followers
September 30, 2011
The phrase “animal spirits” comes from John Maynard Keynes, the great British economist, who saw the role of emotion and irrationality as looming large in economic behavior. As Akerlof and Shiller see it, Keynes had it right, but the neo-Keynesians who followed him watered his theories down to conform more closely with the “invisible hand” classical economics of Adam Smith. So what we were left with was a model of rational economic decision-making, where every consumer and businessperson carefully and logically analyzed the real value of assets, was capable of figuring out how to discount future cash flows and account for both inflation and the cost of capital, and never ever succumbed to wild manias or profound despair. This is the (somewhat caricatured) version of economic thinking that Akerlof and Shiller attack.

Adam Smith too had a theory that was mostly right, but could not explain the dysfunctions of economies – such as why unemployment rose to 25% during the Depression, and stayed there for years. Why didn’t workers simply cut their wage demands to a level that employers were willing to pay? In Smith’s model (created in the 18C), economies were supposed to naturally find their equilibrium point at, or very close to, full employment. Unlike Smith, Keynes had the benefit of the Great Depression staring him in the face when he wrote his book in the mid-1930’s, and he knew that model didn’t always work. The solution: have government step in and use heavy deficit spending to pump up demand and drive down unemployment.

Then, along came Milton Friedman in the 1970’s, in the midst of the raging inflation of that decade. With his stress on bringing down inflation by controlling the money supply, and allowing markets to operate freely, and his assertion that “government was the problem”, Keynesianism took a back seat. Ronald Reagan and his acolytes took Friedman’s view, added a dose of supply-side “voodoo economics” – cut taxes and deficits will somehow disappear! – and became the hero of the Republican party. At least, he became the hero after the US got over its painful recession in 1981-82. Reagan was a master story-teller and his story became the dominant story. As Akerlof and Shiller see it, “Great leaders are first and foremost tellers of stories”. They go further and say that, “The stories no longer merely explain the facts; they are the facts.” The Reagan-Friedman story was so strong it even survived the S&L crisis that caused the failure of hundreds of S&Ls in the 1980’s, brought to their knees by the de-regulation of that industry, combined with a strong dose of executive shenanigans.

Fast forward to the recession of 2008-2009. The authors look at the roots of the recessions and depressions of the previous 120 years or so, and identify the factors that they think need to be brought into a deeper understanding of economics to explain the current crisis. These are:

• Stories: Stories have great power to drive economies. In the 1990’s, it was the New Economy created by the Internet, that was supposed to re-write the rules of business. Price/earnings ratios soared to 100:1 and beyond. The dot-coms took a very hard fall, most of them never to rise again. In the 2000’s, it was the “you can’t miss with real estate” story, followed by the great housing crash of 2008, which still continues today. It’s not clear what the next great story will be – clean tech?

• Fairness: Economists use too simple a model of how people enter into buying and selling transactions exchanges. Fairness is central to how exchanges really work. Think of the classic experiment with two people who have to split $100 – with one person defining how much of the pot each of them will get, and the other person deciding if the deal is acceptable or not. If it’s rejected, neither of them gets anything. In conventional economic thinking, any amount of money is better than nothing, and ought to be accepted. Yet people will routinely reject offers seen as “unfair”, even if it costs them money. We are hard-wired for a fairness ethic – at least where fair exchange is concerned. This appears to be a cultural universal.

• Corruption and Bad Faith: Anytime there is a great mania, corruption will come to light when the air starts to come out of the bubble. Or, as Warren Buffett put it, “When the tide goes out, you find out who’s been swimming without a bathing suit.” It looks like Madoff will be the pre-eminent naked swimmer of this recession, but he was in good company. Failures of government regulation can cause the effect of this kind of behavior to spin wildly out of control, so that these acts are no longer simple white-collar crimes, but threats to the system as a whole. Example: The behavior of unscrupulous mortgage originators, who sold mortgages to people they knew would be unlikely to keep up with the payments once their variable rate adjusted upward, was abetted by regulatory failure. Not only were mortgage lenders largely unsupervised, so were the near-banks (hedge funds, investment banks …) who took those sub-prime mortgages, repackaged them as derivatives to miraculously make the risk “disappear”, and peddled them to investors around the globe.

• Confidence: Why does the stock market and the real estate market overshoot on the way up … and on the way down? Akerlof and Shiller attribute a good part of this to over-confidence on the way up, when everyone feels like an investing genius, and fear on the way down, when everyone thinks the Great Depression is upon us. (Now, if only I could figure out how to time it perfectly …) Ultimately, it was a crisis of confidence that caused the entire banking system to teeter on the brink in the fall of 2008.

• The Money Illusion: Give people a choice of, on the one hand, having their salary rise 10% with prices rising 10% at the same time or, on the other hand, having their salary and prices both stay the same, people will always go for that 10% “raise”. It just makes us feel better. This same behavior, though in even more extreme form, is one key factor that prevents workers and job-seekers from lowering their wage demands during deflationary recessions.

Overall, this is the best and most comprehensive book I’ve read so far on the sea change in economics that has been taking place during and in the wake of the two great economic boom / busts of the past dozen years. Shiller’s 2008 book, The Sub-Prime Solution, is also a great read, though more narrowly focused.
Profile Image for Sagar Jethani.
Author 1 book16 followers
January 24, 2011
It was with great anticipation that I looked forward to reading "Animal Spirits". If ever there were a time for a sobering analysis of how macroeconomic events actually occur, that time was surely now. Instead, what I found was a volume which took great pains to destroy a carefully-crafted straw-man: that species of academic economist who, in defiance of common-sense, insists that people behave according to the universal dictates of rational self-interest in every situation, no matter what the exogenous circumstances happen to be. In other words, the straw-man is a stand-in for Milton Friedman, or possibly Alan Greenspan.

I expected more from the authors, given their sterling credentials. George Akerlof won the Nobel Prize in economics in 2001, and Robert Shiller has long been an astute observer of the madness of crowds. Instead of a penetrating analysis which yields up new findings, the reader is left with conclusions that are obvious to anyone familiar with the way economic decisions are made in the real world. Akerlof and Shiller remind me of George Soros, who, similarly, exults in destroying a straw-man which only the most extreme worshiper of untrammeled free-market capitalism approximates.

Do we really need another missive which forcefully argues that people often act in irrational ways that harm their own self-interest? Have we not seen overwhelming evidence in the past three years that unfettered capitalism can destroy the very basis of wealth accumulation, and that there is a proper and appropriate role for government regulation to minimize the swings in consumer confidence? The authors appear to be writing for an extreme skeptic, who, even after witnessing the dynamics involved in the housing meltdown and credit crunch, remain unconvinced of these precepts. But which intelligent observers continue to need persuading?

Insofar as "Animal Spirits" takes the reader on a guided tour through some of the financial cataclysms of the 20th century, it is useful as a historical narrative. The outcome of this narrative, however, is disappointing. The book's agenda is initially described as being fairly ambitious, setting about to do no less than change the way we interpret and understand economic events. By the end, however, the reader is left scratching his head, wondering why he is left with a set of recommendations that amount to little more than the warning that people will sometimes behave irrationally, and that this behavior can often have a disproportionate effect upon macroeconomic patterns.
Profile Image for John.
227 reviews42 followers
February 17, 2016
In The General Theory, John Maynard Keynes wrote that the switches between optimism and pessimism which drive rises/falls in investment spending which, in turn, cause rises/falls in output, were driven by '"animal spirits". This was always one of the weaker points of Keynes' analysis, essentially a big shrug of the shoulders, removing any notion of economic actors rational responses to changing circumstances. This book is simply a longer restatement of that argument. People are crazy, so the authors say, their behaviour is irrational and, in the Keynesian way, this can cause economies to crash and stay crashed. Only the wise hand of government on economic the tiller can save us.

This leaves several questions unanswered. Why do people make the same mistake over and over? There is no learning in the model. Why is empirical evidence used so sparingly? In cases such as 1929 and 2008-2009, there were identifiable, proximate causes for people's actions which we can turn to without invoking "animal spirits". Why is it assumed that the politicians who will save us from our irrationality are any more rational than we are?

Psychology in economics is a fascinating and emerging field, but you'd never know it from this shallow and reductive book.
Profile Image for Graeme Newell.
202 reviews51 followers
February 25, 2020
I ended up abandoning this book after the first few chapters. I agree with much of what Akerlof asserts, but the author's continual tone of "the other side is a bunch of idiots" just got tiring. The worlds of psychology and economics both deal with the volatile world of human judgments and are therefore notoriously inexact sciences. I prefer authors who approach both of these topics with a collegial spirit and the humility to understand there is much work still to be done.
Profile Image for Ed.
333 reviews31 followers
April 29, 2009
As someone who trained as an economist and who has been digesting the implications of behavioural economics for economic theory, this book takes the story further: into macro-economics or how the whole economy works. Like the original work of Keynes (not the subsequent simplification), these authors (it is actually by Akerlof who won the Nobel prize for economics AND Shiller who wrote Irrational Exuberance)transform how we should see markets operating effectively. This means with intelligent government regulation to curb the effects of mass irrationality of booms and busts, and consumer insight into their own irrationality: house prices will go up for ever and always have everywhere: NOT! They never go down NOT! Like Keynes they are passionate believers in what markets can achieve, as well as advocates of the need to regulate markets to preserve them and the whole system. Free markets need saving from themselves.

This book provides a more convincing and deeper explanation of the recent credit crisis than any I have read. It does not require much prior economics study but it still has much to teach the economics specialist.

If you want to better understand the economy for the rest of your lifetime: read it early on in your career!
Profile Image for Ryan Melena.
31 reviews
October 31, 2011
I found this book to be a significant disappointment. The only point of interest, for me, was the in-depth discussion of "money illusion" and its affects on our economy. Outside of that, the booked felt jumbled. Despite my natural proclivity to the authors' point of view I felt their arguments were poorly made. Additionally, the book seemed to stray into apologia and misinformation regarding the events that led to the current recession. It perpetuated the "Fannie & Freddie caused the crisis because politicians made them loan to poor people" myth and wall-papered over the fact that most of the major financial players were perpetrating rampant fraud (as apposed to just acting in a morally questionable way). They also failed to follow their "animal spirits" idea to its logical conclusion, that the unpredictable nature of human behavior severely limits the utility of economics as a science. They seem to imply that, given more study, "animal spirits" could be understood and incorporated into economic formulas and models. This idea seems to fly in the face of the "illogical nature of animal spirits" thesis that the book spends so much effort explaining.
Profile Image for Joel.
5 reviews
July 18, 2015
This book is a qualitative/non-technical discussion about what is currently being debated in Macroeconomic theory. There have been several posts on different boards about this book taking a "liberal" position. If you're interested in Economics as a science, ignore them. If you're looking for a book that will bring redemption to Reagan-era supply side economics, this is not the book for you.

Akerlof and Shiller are notorious advocates of Keynesian thought. Not because of some underhanded desire to allow government to intrude in our lives, but because Keynes believed in taking account of the qualitative and intangible aspects of human behavior. Admittedly, (as a side note) they do refer to some of Milton Friedman's conclusions as naive. This can be irritating, if you're a strict monetarist. But they also don't go easy on some of Keynes' assumptions.

Current Economic thought is a science of optimization. Akerlof and Shiller are not suggesting an abandonment of mathematics in Economics, but advocate the inclusion of psychological probabilities. What they suggest is that humans do not have access to perfect information, nor do they act in an entirely rational matter.

Anyone who has taken a single class in sociology or psychology will instantly realize the "no duh" factor from this concept. But in Economics, the technology to quantify these probabilities on a Macroeconomic scale is relatively new. Akerlof and Shiller have stumbled upon a premise that has haunted mainstream economists for forty years and has been a driving force in Austrian Economics for even longer: Humans are not entirely rational creatures with solely economic motivations...a devastating shock to macroeconomists everywhere.

In the end, their conclusions are modern and well-thought out. Behavioral and Experimental economics appears to be the next evolution in Economic theory. You may not like their conclusions as it relates to policy, yet the premise of expanding theory to include those factors once deemed as "intangible" or "irrational" cannot be understated.
Profile Image for Rhys McKendry.
17 reviews1 follower
August 4, 2021
The book sets out to discuss animal spirits, yet I still feel I’ve barely been given any information! Economics as a discipline needs to move away from ergodicity, but the vagueness of the book leads me to believe that many will think there is no valuable alternative (when there is!). The authors’ explanations have little substance and it heavily undermines their arguments.

The theory of animal spirits, which is underpinned by fundamental uncertainty, has been developed heavily by Post Keynesian economists and yet this isn’t mentioned once in the book. There is a fleeting mention of Knight’s thoughts on uncertainty vs risk, but no theory of animal spirits can claim to be rigorous without properly laying out the insights of scholars on uncertainty.

I’m also gobsmacked at how Alerlof & Shiller have taken the main tenants of Hyman Minsky’s Financial Instability hypothesis and not referenced him?! Uncertainty and animal spirits are what drive cycles in Minsky’s model and yet they argue that they are on new territory. Furthermore, they talk about fairness in wage demands and put forward their perception that this is an under appreciated topic...if only this wasn’t a main pillar of Post Keynesian theory of wage demands/inflation....

The criticisms of Friedman’s use of rational agents and varying inflation expectations are poor (and unsurprisingly vague), especially when Keynesian economics has much more rigorous criticisms.

A short book, but I’m not inclined to recommend it.
Profile Image for Ram Kaushik.
350 reviews28 followers
March 26, 2019
Considering this is written by two Nobel prize winners in economics, this is a surprisingly accessible work, explaining several foundational ideas in behavioral economics. After the 2008 meltdown, few students of economics would argue that ideas like the rational actor paradigm and the invisible-hand-of-the-market are infallible, so sometimes it sounds like they are preaching to the choir. However, I did learn about how psychological biases can impact the economy through unstable feedback mechanisms. All-in-all, an interesting book for those curious about the subject of behavioral economics, and along the lines of other books by Dan Ariely, Richard Thaler and Daniel Kahneman.
Profile Image for Marcel Santos.
81 reviews8 followers
December 16, 2020
This book sees Macroeconomics through the lens of Behavioral Economics (BE).

For those who start studying BE through the works of its founders and first commentators, it is natural to associate it with Microeconomics. This is due to BE’s focus on human behavior at the level of the individual, which can be (and is) extrapolated to broader group levels to better describe and predict economic behavior and its outcomes. By incorporating scientific observations of human behavior, Microeconomics has gained from more realistic analyses, which has been changing the way assumptions are considered and predictions are made relative to how individuals decide and behave.

In “Misbehaving”, Richard Thaler, one of the founders of BE, complained about the lack of development in the field associated with Macroeconomics. George Akerlof and Robert Shiller’s “Animal Spirits” started to fill this void, and its authors did it in a way as if BE had always belonged to this field. The authors recognize confidence, fairness, corruption, money illusion, and stories as the “animal spirits” relevant at the Macroeconomics level. Robert Shiller further developed “stories” in his remarkable recent book “Narrative Economics” using very creative tools and methodology.

These factors have always been present in human actions but economists never paid them mind, as human uncertainties severally complicate economic models of prediction and are inconvenient for laissez-faire supporters.

In the book, the authors borrow the term “animal spirits” from John M. Keynes’s “General Theory of Employment, Interest and Money” to criticize the mainstream standard model of human rationality. Keynes had used the term to exactly describe the imponderable human factor in massive economic behavior and outcomes — in all its irrationality.

Written in the heat of the 2008 subprime crisis, “Animal Spirits” takes this avenue opened by Keynes to explore further this essential but somehow previously ignored aspect of economics, using the modern tools developed by BE. The authors then blame what they call irresponsible deregulation policies of the 1980s in the US and UK, inspired by the laissez-faire-rational-based-mainstream economic thought, for the most recent economic crises. They further claim that by ignoring “animal spirits” in human actions, mainstream economics will continue to fail in predicting such crises.

The authors do not consider and rebut the natural counter-argument on who regulates the regulators – as regulators are also human beings subject to errors and biases – which may ultimately cause other economic imbalances. The book though is a powerful shot taken by two of the most prominent economists nowadays in support of more regulation of the economy in the old-never-ending dispute between free-market supporters and interventionists.
Profile Image for Patrick.
Author 33 books26 followers
September 28, 2013
The dawn of cognitive macroeconomics

JDN 2456563 PDT 15:10.

A review of Animal Spirits by George A. Akerlof and Robert J. Shiller.

When I first came to CSULB about a month and a half ago, we had an orientation for graduate students. One of the faculty members there (Seiji Steimetz, for whom I am now a graduate assistant, and whom I have come to adore) asked us all a question: "What kind of research do you want to be involved in?" Most of the students didn't have an answer. I had an answer I didn't quite know how to explain, so I basically coined a new term: "Cognitive macroeconomics. Basically, what happens to our understanding of the macroeconomy when we stop assuming people are rational—because they're not?" He replied, "Like prospect theory to explain inflation?" That wasn't quite right, but it was a more accurate response than I'd expected. Actually that would count as cognitive macroeconomics I think; it's just not in particular what I had in mind. "Yeah, something like that," I said.
Animal Spirits is, in all but name, an introductory textbook on cognitive macroeconomics. It is written in a very readable style, and uses hardly any math; but it marks a paradigm shift in macroeconomic theory. Instead of assuming that workers and capitalists are rational, let's study how they actually think and behave.
Daniel Kahneman and Daniel Ariely (collectively I shall call them "the Dans") basically founded cognitive economics, but they are really cognitive microeconomists. They talk about issues at the level of individual firms and consumers. I find neoclassical microeconomics mind-numbingly boring; cognitive microeconomics is more interesting—and more valid—but it still lacks the glamor of large-scale impact that macroeconomics promises. If we want to live by Keynes's "the world is ruled by little else", it is in macroeconomics that we will do so.
Indeed, it could be argued that Keynes himself was a cognitive macroeconomist; after all, he was the one who coined the term "animal spirits" from which the book draws its title. But the paradigm shift didn't happen then, because Hicks distorted Keynes's vision into something quasi-neoclassical, making what could have been a fundamental advance into a incremental improvement. It is as if we shoehorned Newtonian physics onto Ptolemy's epicycles, or told Darwin that his theory was useful for other animals, but God still made human beings in his own image. (Come to think of it, a lot of people still think that, don't they?) I doubt Keynes would have recognized what we know call "Keynesian".
I actually know George Akerlof's older brother, Carl Akerlof; he's a physicist at Michigan (whom I interviewed for the Physics Historical Project). Hopefully someday I'll get to work with George as well; his work sounds like almost exactly what I want to be doing.
Part One explains the five "animal spirits" Akerlof and Stiller think are most important: Confidence, fairness, corruption, money illusion, and stories. The first three are relatively self-explanatory; the fourth is familiar to economists ever since (you guessed it) Keynes, though it has fallen out of favor.
The fifth I think is worth exploring further, since it may actually be the most important. Cognitive scientists have basically established that human short-term memory comes in two basic data formats, image and audio. The latter is literally audio, basically a two-second ring buffer: You can remember longer sentences if you say them faster. The former is not a bitmap image, but more like vector graphics; you can scale and stretch the image in your mind, but it has limited detail. To say that the human brain stores in SVG and WAV is only a slight exaggeration.
But long-term memory takes a fundamentally different format; I think the best way to describe it is to say that the native data format for long-term memory is narrative. We use stories to organize our own past, our culture, our ideas for the future—even our scientific theories. This is why epic poems were so successful in ancient times, and novels are so successful today; they link into this fundamental data format. (Epic also makes use our two-second audio buffer through techniques like rhyme and meter.)
The universe, by contrast, does not appear to be made of stories. Sometimes things happen randomly. Often the cause is unavailable to us. Most historical events are driven by slow pressure from millions of sources, with no clear "Great Man" to be the hero or the villain. Reality is unrealistic, and sadly, the good guys don't always win.
Animal Spirits uses this to explain the observation that Nassim Nicholas Taleb made in The Black Swan: Why do pundits always come up with a story to explain any random fluctuation? Because human beings like to organize their world in terms of stories.
The second part of the book tries to apply these "animal spirits" to real-world problems in macroeconomics; this is where the book comes up a little short. Akerlof and Shiller sketch out a plausible qualitative account of what happened in the 2008 crash and the Second Depression, and offer some basic suggestions on how we might fix the problem... but much of what they say is vague, and none of it offers sharp, quantitative predictions.
This is the one criticism neoclassicists make of cognitive economics that I do take seriously: It's easy to show flaws in the current models—but do you have a better one? Neoclassical economics succeeds as a science in one sense: It is wrong. It has gone beyond not even wrong and actually made it to wrong—it makes precise predictions that are incorrect. Cognitive economics isn't quite at that point yet; we have the potential to make predictions that are correct, which is of course the goal; but right now we aren't making a whole lot of predictions at all, and the ones we are making aren't very precise. Akerlof and Stiller think they can explain all the recessions of the past (or rather specifically the non-oil-related peacetime recessions) by their model; and that would be useful, to be sure. But can you predict or prevent the next recession? With enough free parameters you can fit an elephant; it's easy to make a model that fits the past. The trick is making a model that fits the future. (This is also why "maximum likelihood" is sort of a perversion of Bayesian methods. The maximum likelihood is basically just what you actually found. What you want is the maximum probability, and for that you need a prior distribution.)
They have precise models that give the wrong answer. We have imprecise models that give answers somewhere near the right answer. So we're not quite there yet. We need to make precise models that give the right answer.
That is why this is only the dawn.
Profile Image for Tuncer Şengöz.
Author 6 books227 followers
August 17, 2018
Kitap 2008 krizi öncesinde yazılmaya başlamış ve krizden hemen sonra, parasal tedbirler alınırken yayımlanmış. Bu nedenle son gelişmeleri içermiyor.

Hayvansal Güdülerin ekonomi ve finans dünyasındaki izdüşümleri beş ana başlıkta toplanmış: Güven, adalet, yolsuzluk, para yanılsaması ve hikâyeler. Klasik iktisadın bu başlıkları yok sayarak, bütün varsayımlarını "ekonomik beklentilerle hareket eden rasyonel insanlar" üzerine kurması haklı olarak eleştiriliyor ve iktisadın bazı sorunlarına, hayvansal güdüler de dikkate alınarak yeni cevaplar getiriliyor.

Yazarların yaklaşımı ilginç ve dikkate değer. Ancak kitabın konuyu yeterli derinlikte ele aldığını düşünmüyorum. En azından kitabı okumaya başladığımda beklentilerim daha fazlaydı.
Profile Image for Lucas.
276 reviews25 followers
March 15, 2011
The money illusion section was very good, none of the other economics books I've read have given it as much as attention as it gets here.

I also really liked the chapter on the asymmetrical behaviour of compensation in economic down-turns vs. up-turns, again because the subject wasn't given significant text in other books. The book doesn't explore the solution space much- my first thought is that an progressive proportion of wages should be in the flexible form of stock options in the employers company heavily mixed with index funds for the employer's industry and also index funds for the entire market, with restrictions on sales or transfers within some time window of say anywhere from 5 years to retirement age of the employee. The employer would promise employees numerical unit contributions of those funds per year rather than be locked into dollar amounts, accomplishing the desired effect of reducing compensation in recessions without worker antagonism. Higher progressive income tax on dollar compensation coupled with lower taxes on options compensation might accomplish this.

The chapter on the TARP (the bank bailout) is full of unexplained jargon and not very useful, also the chapter on affirmative action doesn't cohere well with the rest of the book. The title of the book isn't well justified in the text, and each usage of the term 'animal spirits' is clunky- simply calling some undesired effect to be due to it and therefore the author's solution is the only one that will work isn't very convincing. It would lose marketability but I wish I would hear an economist talk about linearization- various economics theories of the past are actually linearized approximations of actual behaviour, but behaviour outside of the valid linear range is either undefined (and maybe undefinable) or bears more research.
Profile Image for Karl.
408 reviews63 followers
May 21, 2017
Some of the ideas and info:
* People have no idea how much they should save. 1%, 5%, 10%, 50% of savings. They just look at what others do and do that. Meaning savings rates could change suddenly, as a change in fashion, causing reduced spending and a recession. (Fun fact: By various means Singapore forces everyone to save 40% of income)
* Nor do people understand inflation. Most people think inflation will make things hard to afford, they do not get that prices of assets and wages raise together with everything else.
* But conventional wisdom among economists is that people have perfect knowledge of interest rates, and that they are rational savors.
* A repetition on how bad investments houses are. House values increase by 0.3% per year on average. But go through booms and busts once every few decades. Since at least 1900 most people have considered real estate a great and safe investment. A substantial portion of humanity have the idea that "since there only is so much land and population increases, house and land values must increase in the long run. Ad to this the effect of inflation. If somebody bought a house for 1 million in 1980 and sold it for 3 million kr in 2010 it sound like a great investment - but the krona has declined to a third of its 1980-value, so this investor would have gained nothing.
* Facts on the depression of 1890 and the great depression.
* An annoying chapter on minorities

The Audible narration is very good, except for first five minutes of annoying inhalations. I like listening to Marc Vietor just cause I like his voice, so will probably reread.
Profile Image for John Gurney.
194 reviews18 followers
January 15, 2015
Two Nobel Prize-winning economists, George Akerlof and Robert Schiller, use their version of Keynes's theory of "animal spirits" to explain past financial crises and how economies grow. They have interesting psychological ideas, such as the importance of a national "story", really a paradigm, that drives herd mentality and, thus, irrational behavior. Examples would be the recent, ill-fated real estate mania in the United States or the malaise on the part of business operators in FDR's second term who felt they were under attack.

Much work has been done in behavioral economics in recent years and this study gives excellent synopses. Akerlof and Schiller take to task 'mainstream' classical economics in certain areas, but in a very fair way, acknowledging where 'rational' theories seem to hold, while pointing out those ever-important situations where they fail. Money illusion, feedback loops, subjective societal concerns over 'fairness', and 'stories' are all part of the "Animal Spirits" (hats off to Keynes) investigated here.

I don't agree with 100% of this book's diagnoses or solutions, but the authors write intelligently and present coherent arguments. This is a recommended read for those interested in behavioral economics.
Profile Image for Tim.
461 reviews7 followers
January 26, 2012
If you want to know why the economy works the way it does - this is the book for you. You are not the "rational man" that economists think you are, none of us are. And if you want to understand why they think that way, and how it screwed up our economy this book will help.

Akerlof and Shiller are great economic thinkers who systematically approach economics from the ground up, and focus on how our "animal spirits" affect the economy. It is very well-written, engaging and easy to read.

I particularly liked the section on the labour market and why wages are above the market level. They gave several reasons including:
- fairness with our colleagues;
- our employers want us to work hard;
- we only very rarely accept pay cuts even in times of serious deflation;
- and a lot more.

There is also a more serious undercurrent in this book, about how the "rational" economists ignore how we really feel. Akerlof and Shiller explain why they took these shortcuts and the terrible consequences of that line of thinking.

The Takeaway:
If you want to understand how the world works read this! I have read a lot of these types of books recently and this is the most accessible.
Profile Image for Jade.
163 reviews14 followers
April 28, 2022
It is certainly a worthwhile read. If you took a macroeconomics class in college, you will know all the theory in great detail. You will also become frustrated with how your professor may have mentioned animal spirits once, brushing them off quickly. I know it may seem not scientific or rational to include psychology in the study of economics. But that is what guides normal people’s decisions everyday. I am sick of the economic theory that assumes we are robots who calculate their every next move, only caring to maximise utility. Behavioural economics has been around for so long that it should be widely accepted in textbooks and undergraduate courses.
Back to the book. Is it worth reading? Yes, if you believe in Adam Smith and rational human beings. But if you assume we are irrational and you can see how that may impact the economy, then you already know more than an average economist.
Profile Image for Kenny.
19 reviews2 followers
February 2, 2020
Classical economics is misleading in the analysis of various problems in the economic crisis because they ignore that human nature is the basic driving force on economic development and many of these forces are related to the animal spirit, therefore those animal spirits that cannot be quantified are the most likely answers to understand and solve economics problems, this book mainly introduce and unlocks why traditional macroeconomics theory cannot reveal the root of the economic crisis, why our traditional economic policies are unable to revitalize global economy prosperity, this book is not only a subversion of traditional macroeconomics theory policy but also a solution to people to looking for answers to those questions.
Profile Image for Steven Siswandhi.
305 reviews10 followers
July 12, 2020
A warning on how misleading the neoliberal understanding is, this so-called animal spirit, such as fairness, corruption, race, etc governs much of market behavior, which can't be reduced to economic calculations. The 5-star is for how Prof. Shiller managed to make a complicated topic sound comprehensible and tie it back to common-sense language. It definitely didn't feel this way when I studied the Philips curve at uni, he made it sound so simple, such is the clarity of the writing and the econ wisdom.
Profile Image for Melvin Marsh, M.S..
530 reviews5 followers
February 7, 2018
I was expecting a lot more psychology than there was. All of this was pretty much commonsense which even as a non-financial person, I knew several years ago even before the housing bubble burst.
345 reviews3,030 followers
August 21, 2018
Animal Spirits is a book about macroeconomics with an interesting twist. Rest assured this is not another mundane behavioral economics handbook. The book was written in response to the financial crisis and the authors are economics rockstars. Robert Shiller and George Akerlof are Nobel laureates and Keynsians who believe that government has an active role to play in macroeconomic management. The investment community will recognize Shiller as the prescient economist who predicted the collapse of the tech bubble in 2001 and the housing bust in 2008 and who developed the Case Shiller Home Price index. Akerlof introduced important theories showing the impact of asymmetric information, moral hazard and adverse selection.

The term Animal Spirits was popularized by Keynes in his 1936 book The General Theory to describe the emotions that govern consumers’ willingness to spend and businesses’ willingness to hire and invest. It is a catch all for drivers not explained by rational agents acting in their self- interest. The book calls for a revamping of conventional economics to factor these animal spirits into conventional economic thinking. The book was written for policy makers and academics but is an easy read. It is relatively short and contains a superb bibliography and reference section. Its 14 chapters are split into two parts. Part one contains 5 chapters describing 5 identified animal spirits: Confidence, Fairness (which impact wage-setting and the labour market), Corruption and Bad Faith (financial markets), Money Illusion (being fooled by inflation) and Stories, (culture or zeitgeist). The cornerstone of the theory is how “confidence and the feedback mechanisms between it and the economy amplify disturbances”. Part 2 is a “normative” section structured as 8 questions which the authors answer with their new framework and they include policy prescriptions, some quite insightful. To the investor, section 1 is likely to be more stimulating; it offers a novel paradigm of looking at macroeconomics by including animal spirits into economic thinking. I also enjoyed the authors’ views on the Financial Crisis and Chapter 13 which explains why Real Estate markets go through cycles and was a helpful reminder that all asset prices are subject to cycles. The book’s post script about Monetary Policy is really interesting and ought to have been included as a chapter.

The book requires some basic understanding of economics but you’ll be drawn by the chatty, crisp and anecdotal style - no formulas. The book’s topic of choice renders it quite fuzzy at times, and most of it would not stand up to Popperian scrutiny. In terms of the specific tools for the Investor, Irrational Exuberance is more appropriate. You need to have an interest in macroeconomics to enjoy this book. The key point of the book is that psychological biases and sociological norms add up and have real economic effect. The book did lead me to think differently about economics, but I found the Keynesian prescriptions of government less useful. The question I found myself asking was: aren’t central bankers and economic policy makers just as susceptible to animal spirits as the rest of us are?

The next time you hear a story in a cab about how inner city house prices are a in a secular long term upward trend due to urbanization, that blue chips are destined to decline due to changes in demographics or if you see confidence slipping on a mass scale, it’s worth trying to factor this into your general assessment of interest rates, inflation and GDP. Good luck in trying to find a way to do that!
30 reviews1 follower
November 13, 2018
Animal Spirits is an well-written treatise accessible to both economists and non-economists alike. It summarises well the areas where behavioural economic research indicates real deficiencies in current macroeconomic models; what it does not do is propose obvious alternative models that are not themselves subject to obvious problems.

Akerlof and Shiller (both prominent Nobel-laureate economists) take the strongest aim at mainstream economics's core assumption that individuals act as "expected utility maximisers" when facing risky choices; they argue that individuals base their behaviour not on expected utility but on animal spirits, which they group broadly into five categories: confidence, (perceptions of) fairness, corrupt and antisocial behaviour, money illusion, and stories. With these in hand, Akerlof and Shiller present a compelling set of explanations for macroeconomic questions like "Why do economies fall into depression?" and "Why is saving for the future so arbitrary?".

The text has extensive notes and is well referenced, and this enables the authors to give compelling arguments why, for instance, macroeconomics was too quick to dismiss small amounts of money illusion. Unfortunately, while Animal Spirits does a fine job of identifying problems with current models, it does not perform particularly well at explaining how its conclusions could be incorporated into existing models. This is especially true in that many of the variables they think should be incorporated (stories, for instance) are extremely hard to get "objective" measures on, so were they to be incorporated into macroeconomic models, it seems like it would be even easier for partisan economists to simply pick the set of stories that best aligns with their prior ideological conceptions. Unlike many quantitative measures, it isn't even necessarily clear how one would go about rebutting the validity of "stories" or "perceptions of fairness". The authors perhaps would have done well to devote some time to showing how one could implement their suggestions.

That being said, the text stands as a skilful takedown of macroeconomic hubris and overreach, and on that basis it merits a read for any readers interested in improving macroeconomics — if for no other reason than to know what its blind spots are.
Profile Image for Mark Robertson.
521 reviews1 follower
December 6, 2018
First published in 2009, these two Nobel Prize winning economists discuss here in great detail the role of human psychology in market economies. They point out that most economists assume that humans are economically motivated and rational in their economic decisions despite irrefutable evidence to the contrary. In order to be effective, policy needs to reflect reality.

This book doesn't contain any prescriptions for regulatory reform and policy responses to the Great Recession. Rather, it exposes the shortcomings of classical economics and urges policy makers to consider the world we live in rather than the world their false assumptions describe. Almost ten years after this book was first published it's depressing that the insights offered here have gained little traction among businessmen, politicians and regulators who still believe that unfettered markets are best and that government is virtually always part of the problem, not part of the solution.
Profile Image for Daniel B-G.
547 reviews4 followers
April 5, 2019
Overall, this was good, though imperfect. The opening section on the psychology they equate with Animal Spirits was a little dull, though partly this is because I’ve read books that explain the subject more thoroughly and accessibly, making this reiteration laborious. The second half is much better, though I think it overstates its case. The book also suffers from being written in the teeth of the financial crisis, so its triumphalist claims to understand its exact causes are a little hubristic. I’d argue on the psychology side that it is missing a few key explanatory factors, loss aversion, optimism bias, acclimatisation. On the economics side, it lacks awareness of Richard Koo’s concept of the balance sheet recession and a more nuanced understanding of complexity economics, non-linearity and the disequilibrium they imply. Still the book serves as a valuable brick in the wall of modern economics, I’m just not sure it’s load bearing.
Profile Image for Brew Schmuck.
102 reviews
March 15, 2019
A great new approach to macroeconomics. Alas animal spirits are hard to quantify, thus the fierce opposition by economists. But the book is definitely a fundamental work in the development of economics as a science as opposed to economics as a doctrine.

Given the coming end of yer another business cycle, I’d be curious to read a vol 2 focusing on lessons learned and case studies of these insights being applied in the past decade.

I guess the biggest takeaway is - you can’t go against human nature and human nature is at odds with capitalism. Government regulation seems to be the pill to make humans stomach that system, but so far the pill hasn’t delivered and the patient tends to stop the treatment every so often and go on manic episodes with a bitter end.
33 reviews
December 26, 2017
Animal Spirits is an important critique of how modern "scientific" and "quantitative" macroeconomics has failed to predict or adequately explain important phenomena in economic history, the last of which being the Great Financial crisis of this millennium. In this book Akerlof and Shiller convincingly introduce psychology to macroeconomics to bridge this gap. The main draw-back I found is that some chapters, especially the ones on financial markets, are less accessible to a more general audience. Note that despite the playful illustrations on the cover this is not a light pop-economics book.

I recommend this book to people into macro.
Profile Image for Leonardo.
Author 1 book61 followers
August 16, 2018
Dah. Pérdida de tiempo. Es un libro cortito (muchas notas y bibliografía), terminó en el 70%. La idea del libro es que lo que Keynes llamó "Espíritus Animales" (animal spirits) es lo mismo que hoy día se conoce como "economía conductual" (behavioral economics). Algo tipo: como la gente no actúa como debería, hay que tener un estado grande que regule, y vele porque no se vaya todo al demonio. Muy yankee-centrado. Y se quedó viejo pronto porque usa la crisis del 2008 todo el tiempo como referencia.
September 14, 2011
The cover sort of promised an engaging text about the ways our "animal spirits" twist and override our rational choices. Instead, it's essentially an extended overview of methodological debates within the economics profession. The "road map for reversing the financial misfortunes besetting us" that the publishers promised is simply not there. The style is accessible, but rather boring. All in all, a disappointment.
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