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

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

Akerlof and Shiller are the first to try to rework economic theory for our times. The effort itself makes their book a milestone. . . . And their book takes their case not just to economists, but also to the general reader. It is short (176 pages of text) and easy enough for laymen to understand.
(Louis Uchitelle New York Times Book Review )

Animal Spirits [is] . . . the new must-read in Obamaworld.
(Michael Grunwald Time )

[Animal Spirits] really applies to all the big areas where we need change.
(er Orszag, Obama budget director (quoted from “Time )

White House Budget Director Peter Orszag is a numbers guy, a propeller head as President Obama would say. But as David Von Drehle and I write in this week’s print version of Time, Orszag has been spending his time recently reading not about spreadsheets, but about psychology. In particular, he has been reading a new book by the economists George Akerlof and Robert Shiller called Animal Spirits: How Human Psychology Drives The Economy, and Why It Matters For Global Capitalism. . . . We are, it turns out, slaves to the Animal Spirits. They have brought us to our knees. And now they are the only things that can save us.
(Michael Scherer Time.com’s Swampland )

In their new book, two of the most creative and respected economic thinkers currently at work, George Akerlof and Robert Shiller, argue that the key is to recover Keynes’s insight about ‘animal spirits’–the attitudes and ideas that guide economic action. The orthodoxy needs to be rebuilt, and bringing these psychological factors into the core of economics is the way to do it. . . . The connections between their thinking on the limits to conventional economics and the issues thrown up by the breakdown are plain, even if they were unable to make every link explicit. Even more than Akerlof and Shiller could have hoped, therefore, it is a fine book at exactly the right time. . . . Animal Spirits carries its ambition lightly–but is ambitious nonetheless. Economists will see it as a kind of manifesto.
(Clive Crook Financial Times )

Animal Spirits is a welcome addition to our Hannitized national economic debate, in which anyone who advocates government spending risks being labeled a socialist. . . . Animal Spirits is most compelling when the authors summon all the key behavioral patterns to explain vast, complex phenomena such as the Great Depression. . . . Animal Spirits . . . [is] aimed squarely at the general reader, and rightly so: Macroeconomics is now everybody’s business–the banks are playing with our money.
(Andrew Rosenblum New York Observer )

[A] lively new financial crisis book.
(James Pressley Bloomberg News )

The two superstars have produced a truly innovative and bold work that attempts to show how psychological factors explain the origins of the current mess and offer clues for possible solutions. At a time when plummeting confidence is dragging down the market and the economy, the authors’ focus on the psychological aspect of economics is incredibly important.
(Michael Mandel BusinessWeek )

What Sigmund Freud did for the study of the mind, George Akerlof and Robert Shiller are doing for economics. Freud, healer or fake–take your pick–built a career and a field of medicine on the idea that people are driven by irrational forces. Akerlof, professor of economics at the University of California, Berkeley and winner of the 2001 Nobel Prize in economics, and Shiller, the Yale economist who is the eminence grise of the housing meltdown, argue that massive government market intervention programs are the only way to turn fear into enthusiasm for spending and investing–the ‘animal spirits’ that are an essential part of recovery. . . . Akerlof and Shiller pick up on the idea of the emotional impetus to investment. With elegant reasoning and lovely prose, they demonstrate that we’ll all be wallowing in misery unless governments around world, especially the in the G7 nations, help to return markets to optimism. . . . Animal Spirits is a fine discussion of the last few decades of development of economic theory, especially monetary economics.
(Andrew Allentuck The Globe & Mail )

[T]his book is rather more than the usual lament about the failings of economics. Its authors are two of the discipline’s leading lights. . . . Most of the time, the unrealistic assumption of rationality serves economists fairly well. They should, however, be more prepared to depart from it, especially in times like these–even if that makes behaviour more difficult to describe in elegant equations. Messrs Akerlof and Shiller have therefore done their profession a service.
(The Economist )

With Animal Spirits we hone in on how incentives and narratives can be created to channel the human psychological factor into collectively healthy directions, and how to be aware of the fictions we tell ourselves about how we wish the world and greed and financial security worked. [Animal Spirits] sheds light on complex issues and leaves readers with a better grasp of undercurrents and–most importantly–a rediscovered belief in principles of common sense and caution.
(Daily Kos )

The new book from George Akerlof and Robert Shiller, Animal Spirits, has been getting a lot of press of late, and quite rightly: it’s really good. It’s not only very readable; it also offers a compelling vision of a very different type of macroeconomics–one where behavioral considerations are front and center, rather than simply providing what Clive Crook calls ‘ad hoc modifications’ to the standard, ridiculously oversimplified and unrealistic, model. . . . [I]f you read only one book on this subject, make it Animal Spirits.
(Felix Salmon Portfolio.com )

As George Akerlof and Robert Shiller show in a new book Animal Spirits, this is no freak storm. It may mark the long-awaited encounter between psychology and economics. . . . Akerlof and Shiller’s book is probably the first macroeconomic exploration of the subject that is accessible to those interested in the subject but who don’t have the academic training to understand the detailed argument.
(Mint )

My book of the week is an easy one this time around: it’s Animal Spirits, by Robert Shiller and George Akerlof. . . . Admittedly, I’m biased as a fan of both Shiller’s and Akerlof’s. Believe me, however, when I say the blessedly brief Animal Spirits is a thoughtful and well-written look at how economics discarded psychology and lost its way on the trip from Adam Smith, through Keynesianism, to laissez-faire. The book puts the current crisis in a useful economic context, with consistent and practical selections from behavioral finance illuminating everything along the way. . . . Highly recommended.
(Paul Kedrosky SeekingAlpha )

Another contribution to the human-nature-ensures-economics-is-irrational school of thought. But, unlike many of the rants against people trying to make an honest profit, this is a measured examination of how the present crisis is explained in economic terms. And so it should be. George Akerlof is a Nobel prizewinner, Robert Shiller teaches at Yale and is the author of Irrational Exuberance, which should give you an idea of this one’s approach. This fascinating work uses economics to explain real-life issues, such as real estate price cycles, to key policy problems, such as the relationship between inflation and employment.
(Stephen Matchett The Australian )

George Akerlof and Rober Shiller’s Animal Spirits is a plea to start believing our lying eyes rather than the model. Rather than try to explain away the apparent irrationality in human behaviour, Akerlof and Shiller say we need to try to understand it and shape policies that take it into account. . . . The core message of Animal Spirits is that we should stop trying to cage the spirits and instead admit their central importance. Specifically, this means that world governments will need to intervene forcefully in the current economic crisis with both fiscal stimulus and direct measures to stimulate lending–to restore some of the confidence that the crash has sapped.
(Matthew Yglesias The National )

In saluting Keynes’ quip, Akerlof and Shiller argue that much of the story is in the unreliability and incompleteness of supposedly rational behavior–the micro-foundation of the free-market model. They contend that modern economics, even self-described Keynesian economics, has given short shrift to this core behavioral insight. . . . Their best chapter is on the limited capacity of central banks to prevent or cure calamities.
(Robert Kuttner The American Prospect )

Akerlof and Shiller take psychological research seriously, and it’s refreshing to see that they’re not trying to reinvent the wheel. . . . The book is an interesting read and would probably be very useful for an undergrad class that needs an introduction to behavioral economics. A & S do a nice job of moving between the theoretical and the practical, the empirical and the implied. The writing is accessible and the topic is more than relevant to our current economic situation.
(Orgtheory.net )

Animal Spirits is succinct, clear and lively.
(Brad Willis Edmonton Journal )

In an intriguing new book, Animal Spirits, US economists George Akerlof and Robert Shiller argue that psychology plays a far bigger role in determining economic outcomes than economists realize–and that, broadly speaking, people get what they expect. If we think good times are ahead, we act confidently in a way that creates them. And if we expect a downturn ahead, we act defensively and unwittingly ensure that’s what we get.
(Tim Colebatch The Age )

User Ratings and Reviews

5 Stars Rethinking economics’ fundamental principles
Nobel laureate George A. Akerlof and prescient Yale economics professor Robert J. Shiller explain the role of human psychology in markets. They say conventional economic theory assigns too much weight to the role of reason in economic decision making, and too little to the role of irrational emotional and psychological factors. That insight would have been novel a few years back, but numerous other authors have made the same point, though few with such sterling credentials. Having asserted their beliefs and offered evidence about the power of emotions, or “animal spirits,” the authors prescribe curative policies though they don’t always illuminate their proposals’ full real-world impact. Akerlof and Shiller’s distinguished reputations command attention, and getAbstract confirms that their book is worthwhile reading. Yet, those who know the authors’ bodies of work may wish for even more insight.

4 Stars Above average but a little dry and textbooky.

http://www.kabam.com/?p=1844

I had heard a lot of good things about this book and I admire both the authors. Unfortunately it came off a little to academic and observed on much more a “macro” level. I prefer to track economics and the concept of “animal spirits” on a much more refined level.

Since I typically trade on a very short term basis I’m more concerned about what may be happening this instant in a particular market. As opposed to the current yearly or even decade long trend on a global basis.

The middle third and final third were very interesting and engaging, but the middle third could have almost been any other econonomics textbook based on Keynes and Freidman.

Overall I would recommend it to anyone who was curious about how emotions and mental swings can effect markets in a sizable and profound way. But you need to be very interested in economics to enjoy it. If you only have a passing interest it will be drudgery to read.

3 Stars Three serious mistakes
I’m reluctant to criticize Yale’s Robert Shiller, who has spoken highly of my own book “The Big Three in Economics,” and who has an exceptional record in predicting the top of the stock market in 2000 and the real estate markets in 2006.

There are some good ideas and details in “Animal Spirits.” For example, I didn’t know that Enron abused the new “mark-to-market” rules established by the SEC to overbook profits (pp. 33-34).

But I was surprised by the large number of gaffes made in “Animal Spirits,” such as:

1. The authors failure to include any reference to Milton Friedman and Anna Schwartz’ classic “Monetary History of the United States” in explaining the cause of the Great Depression in the 1930s. They adopt an entirely outmoded Keynesian explanation, and make no reference to the collpase of the money stock during the early 1930s. As Friedman & Schwartz demonstrate, this monetary collapse was completely avoidable.

2. On page 130, Akerlof and Shiller claim, “In the absence of social security people would grossly undersave.” Isn’t it just the opposite? It is BECAUSE of social security that people grossly undersave, especially poor people who have no surplus left after shelling out 15% of their paychecks for FICA. In China, where there is no federal social security system, the Chinese people grossly oversave.

3. On page 173, Akerlof and Shiller state, “Without intervention by the government the economy will suffer massive swings in employment.” Again, shouldn’t it be just the opposite? It is BECAUSE of intevention by the government that the economy suffers massive swings in employment and output. The authors themselves point to numerous examples in their book where government caused instability in the marketplace, such as the SEC “mark to market” ruling that helped Enron overvalue its assets….and Andrew Cuomo, HUD Secretary under Clinton, who “mandated lending by Fannie and Freddie to underserved communities….Cuomo forced Fannie Mae and Freddie Mac to make loans, even if that meant lowering credit standards.” (page 155) So who started the subprime lending scandal? The federal government (HUD and other agencies).

In short, I question the whole thesis of this book, that “left to their own devices, capitalist economies will pursue excess….manias and panics.” (preface) I defy the authors to show me an example of capitalism going haywire without bad government playing a significant role in the background.

5 Stars Fantastic, with a great narrative voice
One of the hardest parts of communicating economics is to try to use a voice that can appeal to people who don’t have degrees in economics. This books achieves that and more: while there are parts where the authors use extensive economic models to explain irrational behavior, it’s possible to catch the gist of what’s going on and muddle through those minor parts. What helps is the fact that both authors are able to present their arguments–that Keynes’ ideas of “animal spirits” needs to be revived in modern economics–in a convincing way. In fact, sometimes they’re a little TOO convincing. When explaining away Milton Friedman’s overly simplistic throwing away of “money illusion,” they use real examples that just about ANYONE can relate to. It was only a few days ago when I had a conversation with someone who was astounded that Led Zeppelin’s first U.S. tour “only” grossed $5 million. That number, of course, was NOT adjusted for inflation …

1 Star Academic Apologists for Obamanomics
Here it is in a nutshell: The role of government is to be sure capitalism provides us not what we think we need, but what we really need. And who decides what we really need? Why the government, of course.

You see, we’re the dumb animals, and the federal government is the wise zookeeper.

Don’t buy this thing. If you feel the need to read it, get it from the library. But know that the sub-title “How Human sychoogy Drives The Economy, And why It Matters For Global Capitalism” is largely a come-on.

If this is what passes for state of the art economists’ thinking, we’re in deep caca.

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