What is animal spirits

Animal spirits refer to the emotional and psychological factors that influence human behavior, particularly in economic decision-making. The term was coined by John Maynard Keynes to describe the instincts, proclivities, and emotions that seemingly influence human behavior, which can be measured in terms of consumer confidence.

1. Definition and Origins: Animal spirits are the nervous energy that is the source of physical sensation and movement, as described by Keynes in his 1936 book The General Theory of Employment, Interest and Money. They represent the emotional and psychological states that can affect financial decision-making, such as confidence, hope, fear, and pessimism.
2. Impact on Economics: These spirits can either fuel or hamper economic growth. When animal spirits are high, confidence levels are also high, leading to increased spending and investment. Conversely, when animal spirits are low, confidence is diminished, causing a decline in economic activity. Keynes argued that animal spirits are essential for economic recovery, as they drive the spontaneous urge to action rather than inaction.
3. Influence on Financial Decisions: Animal spirits play a significant role in financial decision-making, including investing and trading decisions, especially during times of economic uncertainty and stress. They can lead to speculative behavior, such as the mortgage refinancing mentioned in the Forbes article.
4. Examples and Applications: The concept of animal spirits has been applied in various contexts, including the stock market, where investors' confidence and emotions can drive prices up or down. It has also been linked to macroeconomic factors, such as the changing sentiment that accompanies economic recovery.
5. Cultural and Historical Context: The term animal spirits has its roots in Latin, spiritus animalis, meaning "the breath that awakens the human mind," reflecting the historical connection between the vitality of the body and the emotions that drive human behavior. It has been explored in literature and philosophy, with references to the fluid or spirit present in sensory activities and nerve endings in the brain.

In conclusion, animal spirits are the emotional and psychological factors that influence human behavior, particularly in economic decision-making. They are a crucial aspect of economic theory, as they can either promote or hinder economic growth and stability. Understanding animal spirits is essential for policymakers and business leaders to make informed decisions that take into account the psychological and emotional dynamics at play in economic fluctuations.