Book Review ‘Animal Spirits,’ by George A Akerlof and Robert J. Shiller The New York Times

animal spirits book review
animal spirits book review

Told from the multiple viewpoints of the dead man’s wife, her married lover, the lover’s wife, and both couples’ children, who are unhappily aware of their parents’ secrets, the story has a layered structure that gives it the rich, leisurely feel of a Fellini film. Though narrowly focused on two characters, “The Girl” also feels larger than its form. A young woman recently out of rehab apprentices with a circus snake charmer who hopes to charm her into loving him. He fails but years later rediscovers her in a satisfyingly bittersweet conclusion.

The bubble will burst with very unpleasant results, Shiller warned, well before that actually happened. Chapter by chapter, the analysis is fascinating and usually persuasive. Whether the larger project can be made to hang together, though, I doubt.

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. 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. The only point of interest, for me, was the in-depth discussion of “money illusion” and its affects on our economy.

animal spirits book review

This book sees Macroeconomics through the lens of Behavioral Economics . Psychology in economics is a fascinating and emerging field, but you’d never know it from this shallow and reductive book. How ideas about the blending of spirit and materiality have influenced American thought and life. Chapter 11 presents an explanation for why asset prices and investment flows are so volatile.

About the Author

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.

Unsurprisingly, in 2001, investors were turned off of the stock market and sought alternative investments; many turned to invest in housing instead of stocks. Animal Spirits is a book about macroeconomics with an interesting twist. Rest assured this is not another mundane behavioral economics handbook.

If only we had factored those turbulent emotions into economic theory, we might not be repeating the earlier tragedy. 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. Like I said, this is behavioural economics directly related to the economy at large and it makes for fascinating reading.

The application of such ‘animal spirits’ to these problems provides a fresh perspective on their causes and potential solutions. One particular chapter tackles the issue of involuntary unemployment; the author goes on to suggest that this occurs partly because of notions of fairness in the labour market exerting upward pressure on wages. Arguably the best chapter in Animal Spirits deals with why financial prices are so volatile. The authors point to the role stories played in the 2000 internet bubble; Merrill Lynch’s advertising message changed from a conservative tone before the bubble, to an aggressive/bullish tone at the bubble’s peak. Unsurprisingly, after the bubble popped, the advertising campaign reverted back to its original conservative tone. 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.

Animal Spirits

What the two have in common is the idea that once you take account of animal spirits, people can be guided, without being forced, to do what is in their best interests. 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. 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.

(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”. The stories of Wyatt Earp and company, the shootout at the O.K. Clavin, who has written books on Dodge City and Wild Bill Hickok, delivers a solid narrative that usefully links significant events—making allies of white enemies, for instance, in facing down the Apache threat, rustling from Mexico, and other ethnically charged circumstances. The author is a touch revisionist, in the modern fashion, in noting that the Earps and Clantons weren’t as bloodthirsty as popular culture has made them out to be.

A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. I manage portfolios for institutions and individuals at Ritholtz Wealth Management LLC. More about me here. I am always looking for the right mix of adventure and excitement, while not containing materials that will animal spirits be traumatic and therefore that he won’t finish the book. The bonds between the children and their spirit animals made for interesting character development. We were doing fine until the sort of “climax” battle scene, where everything gets very violent and spirit animals and humans get thrown off cliffs, run through with swords, etc.

Ratings & Reviews

They do this by drawing on the greater understanding of human psychology that exists today, and which Akerlof and Shiller, along with other economists, have incorporated into the relatively new field of behavioral economics. Read it and learn how leaders can channel animal spirits–the powerful forces of human psychology that are afoot in the world economy today. Akerlof and Shiller explore how animal spirits contribute to the performance of the macroeconomy. The range of issues they cover is broad, including the business cycle, inflation and unemployment, the swings in financial markets and real estate, the existence of poverty, and the way monetary policy works. I think it will age rather well as both a narrative of the financial crisis and as a sort of manifesto of what the “New Keynesian” approach to macroeconomics is all about, but it’s not as rigorous as I’d expected.

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It does not require much prior economics study but it still has much to teach the economics specialist. Chapter 7 discusses why animal spirits make central banks a necessity, and there is a post script about how they can intervene to help with the current crises. Chapter 3 discusses corruption and bad faith, and how growing awareness of these practices can contribute to a recession, in addition to the direct harm the practices cause themselves. This includes the propensity to produce not just what people really need but what they think they need, like the mortgage-backed securities, “a modern form of snake oil,” the authors declare. Shiller, a Yale professor, originated the phrase “irrational exuberance” before Alan Greenspan made it famous, and in his research he has documented the rise and fall of home prices going back decades, to demonstrate that the latest surge was far and away the greatest in American history.

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  • The second coming of the Great Depression is, like the original, a direct result of animal spirits.
  • And if you want to understand why they think that way, and how it screwed up our economy this book will help.
  • 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.
  • Shiller, a Yale professor, originated the phrase “irrational exuberance” before Alan Greenspan made it famous, and in his research he has documented the rise and fall of home prices going back decades, to demonstrate that the latest surge was far and away the greatest in American history.
  • The stories of Wyatt Earp and company, the shootout at the O.K.

Without saying how, the book aspires to go further and calls for a new standard model. The assumption of rational optimisation is a gross simplification, no doubt, but despite all the drawbacks emphasised in the book, it has been a highly productive one. Shiller and Akerlof would be the last to deny the power of the insights it has yielded. At issue is whether a psychologically enriched standard model would be too complex to offer useful simplifications. The standard model plus ad hoc modifications suited to the particular case might be the best economics can do. “Terrible Things Could Happen To Us,” about the ripple effect of an unexpected death, sucks the reader in immediately.

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. Chapter 13 suggests that animal spirits can be used to explain the persistence of poverty among ethnic minorities, describing how working class minorities have different stories about how the world works and their place in it, compared to working class white people. The authors argue that the effects of animal spirits make a strong case for affirmative action. Chapter 9 is about why there is a trade off between unemployment and inflation.

Characteristics Of A Developed Economy

The author’s youthfulness helps to assure the inevitable comparison with the Anne Frank diary although over and above the sphere of suffering shared, and in this case extended to the death march itself, there is no spiritual or emotional legacy here to offset any reader reluctance. Distinguished Professor of Economics at the University of California, Berkeley. Robert J. Shiller is the best-selling author of Irrational Exuberance and The Subprime Solution . He is the Arthur M. Okun Professor of Economics at Yale University.

He also introduced the world to “animal spirits,” coining that phrase to describe a range of emotions, human impulses, enthusiasms and misperceptions that drive economies — and ultimately unwind them. The economists who interpreted Keynes “rooted out almost all of the animal spirits — the noneconomic motives and irrational behaviors — that lay at the heart of his explanation for the Great Depression,” ­Akerlof and Shiller declare. 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 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.

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. The chapter on the TARP 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.