Wild Born: Spirit Animals, Book 1 Book Review

animal spirits book review
animal spirits book review

Finally, despite being published in the midst of the greatest recession in history, Animal Spirits has little to say as to how policy makers can use an understanding of ‘animal spirits’ to alleviate current problems. The chapter that focuses on how to resolve the current crisis is disappointingly standard fare, similar to what can be found in most economics textbooks. 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. In a new preface, they describe why our economic troubles may linger for some time—unless we are prepared to take further, decisive action.

Navigating Financial Crises: Nobel Economists Offer Lessons – National Review

Navigating Financial Crises: Nobel Economists Offer Lessons.

Posted: Fri, 14 Oct 2022 07:00:00 GMT [source]

As the authors point out, if people are willing to pay for snake oil , the economy will produce snake oil. This is especially relevant in the financial markets; the authors illustrate how this contributed to the creation of numerous shoddy financial products over the past decade. The authors also note that corruption in financial markets can lead individuals to seek alternative investments.

Still, updating the old notion that the Earp myth is the American Iliad, the author is at his best when he delineates those fraught spasms of violence. “It is never a good sign for law-abiding citizens,” he writes at one high point, “to see Johnny Ringo rush into town, both him and his horse all in a lather.” Indeed not, even if Ringo wound up killing himself and law-abiding Tombstone faded into obscurity when the silver played out. Unchecked, they drive the economy into misbegotten booms and disastrous busts.

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. 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.

Book Review: ‘Animal Spirits’ by George Akerlof and Robert Shiller

The five key animal spirits are treated here, each assigned their own chapter. Animal Spirits is an important—maybe even a decisive—contribution at a difficult juncture in macroeconomic theory. Akerlof, a Nobel laureate, and Shiller, a good bet to become one, are prominent mainstream economists. They don’t deviate easily from orthodox theory, with its allegiance to the proposition that people are essentially rational, well informed and unemotional in the numerous transactions that shape the economy. But in “Animal Spirits,” they have deviated — and they have done so just as mainstream theory self-destructs.

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. 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 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. One of the main reasons for this feeling of mine is that ‘this is a special time and place https://forexarena.net/ 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.

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One of the most identifiable ‘animal spirits’ presented is stories. The authors illustrate the role that stories play in the economy; these stories are closely linked to aggregate confidence in an economy. Take, for example, the pervasiveness of ‘New Era’ stories, such as those that surrounded the internet. Stories have a tendency to spread like viruses through populations, and as such one must consider their effect on the economy.

animal spirits book review

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. 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 end, their conclusions are modern and well-thought out. Behavioral and Experimental economics appears to be the next evolution in Economic theory.

John Maynard Keynesian Analysis

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 standard model plus ad hoc modifications suited to the particular case might be the best economics can do.
  • It does not require much prior economics study but it still has much to teach the economics specialist.
  • The authors effectively define a number of ‘animal spirits’ that are at work in the economy, and then they go on to show how they can be applied to major problems which face economists.
  • 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. Animal Spirits is, in all but name, an introductory textbook on cognitive macroeconomics.

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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. This was an interesting book addressing economic events (depressions, stock market and real estate booms and busts, etc.) without « economics » jargon. The primary theme of the book attacks the basic economics premise that people primarily make rationale decisions in their economic interests, instead of often acting irrationally or in response to perceptions of fairness, corruption, etc. This seems like a common sense approach, but was apparently revolutionary for economists.

animal spirits book review

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 or bears more research. 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.

What to Read

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.

Chapter 5 is about the importance of stories in determining behaviour. Such as the repeatedly told story that house prices will always rise, which caused many additional people to invest in housing following the dot com bust of 2000. Chapter 4 presents evidence that, in contrast to monetarist theory, many people are at least partially under the money illusion, the tendency animal spirits for people to ignore the effects of inflation. Workers for example will forgo a pay rise even when prices are rising, if they know that their firm is facing challenging conditions—but they are much less willing to accept a pay cut even when prices are falling. Both men are old hands at prodding their fellow economists into recognizing exceptions to mainstream theory.

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. Look around you, George A. Akerlof and Robert J. Shiller say. The second coming of the Great Depression is, like the original, a direct result of animal spirits.

When using rational economic thought, the person would be willing to pay the same under both circumstances; however, the study found participants would pay 75% more for the beer from the fancy hotel (pg. 22). The authors explain that because one party in a transaction will feel angry if a transaction is unfair, this desire for fairness plays a large role in determining prices. Penned by George Akerlof and Robert Shiller , Animal Spirits serves as an authoritative book on the topic of the effect of human psychology on the economy, from two leaders in the field of economics. 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.