13 of 13 people found the following review helpful
5.0 out of 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...
Published on 20 April 2009 by Rolf Dobelli
22 of 36 people found the following review helpful
1.0 out of 5 stars Self-satisfied Drivel
I laboured my way to the end of this book and regret the waste of time. The principal thrust is that all other economists are stupid for failing to realise that not everything is measurable or rational. There we are - saved you from reading it, and saved you from the self satisfaction oozing from every page.
(I reckon I must be one of the few writing a review...
Published on 1 Oct 2009 by Mr. John B. Dempster
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13 of 13 people found the following review helpful
5.0 out of 5 stars Rethinking economics' fundamental principles,
This review is from: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Hardcover)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.
23 of 24 people found the following review helpful
5.0 out of 5 stars The start of a Keynesian Reformation?,
This review is from: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Hardcover)A reformation is the restoration of a system of thought to the purity of its original ideas. The Keynesian Revolution in economics of the 1930s departed from the economic orthodoxy of its time partly by stressing the importance to the economy of emotional drives - "animal spirits" . Arkelof and Schiller describe how Keynesian economics was emasculated by the relegation of animal spirits to a minor role, in an effort to make it more palatable to classical economists . The authors argue there is now sufficient evidence to prove the importance of animal spirits beyond doubt, and the resulting re-invigorated Keynesian economics should be sufficient to encourage and legitimise government policy makers to implement measures of sufficient boldness to get us out of the current economic crises. I summarise the ground covered in this book in more detail in an article on wiki.
This book is written in a clear and accessible style, and should appeal to the general reader seeking to understand the reasons for the current financial cries, or just looking to deepen their understanding of the economy in general. The authors extol the virtues of the free market and are against excessive government control, but they make a powerful case for more robust intervention than has been fashionable in western economies for the past few decades. I hope this book is widely read by both policy makers and economists, and has the desired effect in boosting Keynesian influences on political decision making so the current crises can be quickly contained and replaced by a more stable and fairer economy.
I have a few concerns about the books style and lack of polish. The preface is bold and compelling, yet most of the following chapters lack energy and rigour. Its easy to see it was written more than a year back when the neoliberal view point was orthodox, and thus the authors did not feel entitled to argue as confidently as they might today. Shiller in particular is entitled to speak with authority as he was one of the few prominent economists to speak out strongly in favour of Keynesian solutions in the crucial early months of 2008, where if the then still strong free market orthodoxy had not been driven back we'd be in a far worse state than we are now (see my wikki article on the Keynesian Resurgence) While the frequent use of stories to support their positions makes the book a quick and easily digestible read, it would have been greatly strengthened by less sparse use of numerical data and charts, and especially by greater references to the work of others in behavioural economics and other relevant areas. I like authors to often use the feminine pronoun instead of the traditional masculine or the clumsy he / she , but its jarring when they do it all the time and if one's going to feminise 'joe public' , is it necessary to use Josepha rather than the cooler Jo or the more pleasing Josephine? Well perhaps the authors know best how to pitch the book to persuade their fellow Americans, and they felt the urgent need for their message justified rushing to publicise. I hope they will soon release a second edition which will at least be more generously referenced. The message is spot on, I hope the presentation is sufficiently strong for the book to have the revolutionary effect it deserves to.
18 of 19 people found the following review helpful
4.0 out of 5 stars A behavioural view of the economy,
This review is from: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Hardcover)This is a very timely book. It seems that we are at a bit of a turning point in terms of economic ideas, and a more behaviourally-informed view of the world looks likely to become more prominent. The book is also very of the moment as it is pitched as in part sketching out a behaviourally-informed Keynesianism (the term 'animal spirits' being used in the General Theory).
It is basically split into two parts - the first section runs though some key concepts that affect behaviour, and the second applies these concepts to a number of issues. The concepts that the authors highlight are confidence, fairness, corruption and bad faith, money illusion and stories. All of these are important factors as they show how human decision-making is not necessarily rational and self-maximising.
Just to take a couple of examples from this list, Akerlof has been involved in some very interesting research into how conceptions of `fairness' affect market behaviour. Although it might be assumed that we are only motivated by our own interests, and fairness doesn't really matter to us, actually `unfair' behaviour can make (some of) us want to negatively reciprocate (retaliate), and willing to sacrifice our own potential gains in order to punish those acting unfairly. This has obvious implications (as Akerlof has argued previously) in terms of employment relations.
I was also very interested to see stories as one of the factors that they identify. This is a key part of Shiller's analysis of bubble psychology too (the stories we tell each other about what is going on act as positive reinforcement/feedback). As a contemporary example of a story that has given validity to a certain type of activity, think about the number of people using the argument `my house is my pension' as a way of explaining/justifying their punt on property investment. Actually this section of the book is pretty short, which is a shame as I think there's a lot more in this issue.
Turning to applications, Akerlof and Shiller look at a number of policy areas where a behaviourally-informed view of economics might shed some light. Whilst often behavioural economics has appeared to have most to say about individual activity, Akerlof and Shiller are much more ambitious here, and tackle some big issues - why do economies fall into depression, why can't some people find a job, why are market prices and company investments so volatile, why do we get property bubbles etc?
So, for example, the section looking at depressions they not surprisingly put a lot of emphasis on the collapse of confidence. Confidence and the lack of it something that is, of course, widely talked about in terms of economic performance, but hard to quantify. However a review of press reports at the time of the Great Depression illustrates how common a theme it was (especially the need to boost confidence). Akerlof and Shiller also make the point that 'confidence' itself is a 'multiplier', having a reinforcing effect both when it is positive and negative.
The chapter on the volatility on financial prices is one of the ones that interested me most, as it brings together a number of strands explored earlier in the book. Obviously during an asset price bubble you can see a number of factors at play. As prices go up more people are drawn in, pushing prices up further. People then rationalise the bubble through stories (the internet has changed everything, there's a shortage of building land etc), they also get taken in by money illusion when hearing about appreciation in, say, house prices (something those involved in flogging houses are not keen to puncture). In all this to me provides a much more believable explanation of what goes on in terms of asset prices than much professional market commentary.
It's worth making the point here that Akerlof and Shiller are really calling for a bit of a new direction in economics, paying more attention to these kinds of social/psychological factors. This doesn't (need to) require junking existing approaches, as some of this stuff could be grafted on, however they seem to favour quite a shift. Whether there is enough in behavioural economics to bear the weight of such a transformation is a bit of an open question I guess.
Finally a bit about the style. In general, the chapters are fairly short and overall it has a very non-academic feel. Whilst that's a plus point in general, you do wonder whether this might make it seem a bit flaky (which it isn't) to some readers. Sometimes it does feel as if they could have gone into more detail. Hopefully the accessible style won't lead people to assume the ideas expressed are lightweight. This is definitely well worth a read.
5 of 5 people found the following review helpful
5.0 out of 5 stars An antidote for the noughties?,
That economics is going through something of a crisis itself is self-evident. Even the dismal science's house periodical, The Economist itself, ran a series of features to that effect in July 2009. Akerlof and Shiller attempt to redress the balance through the reintroduction of animal spirits via the relatively new school of behavioural economics, of which Akerlof is a leading exponent. They're looking for a "happy home" which allows some fun, but also draws some very clear demarcation lines between what is and isn't acceptable.
The account begins with a look at animal spirits and their gradual marginalisation in economic orthodoxy. They discuss the role of Confidence; how Fairness is often an afterthought; how Corruption and Bad Faith creep in and how, in this context, accountants are our white-hatted heroes (though we do pause for thought over the role of Arthur Andersen in Enron). They lament the fact that too often "economics" books are economics books only, to the exclusion of the other social sciences (for a different treatment of economics which shares this sentiment see also Douglass North's Understanding The Process Of Economic Change).
A poignant aside is their observation on the increasing popularity of poker at the expense of the more collaborative game of contract bridge. This is at least an appropriate metaphor for the nature of finance in the early 21st Century, even if it isn't an indicator.
Having laid the foundations in Part 1, Part 2 proceeds to analyse and explain a number of economic phenomena such as commodities market fluctuations, the low propensity of people to save in the US, and real estate cycles.
Throughout they don't waste opportunities to have a snipe at some of those whose economics have, in their view, landed us in the current mess. There is a heavy hint of criticism of the Chicago school in general, a particularly targeted pop at Long Term Credit Management and its leading lights, Nobel laureates Merton and Scholes, and they even manage a gentle swing at sacred cows such as Milton Friedman and Paul Samuelson.
They also create opportunities to propose solutions, often beginning with the premise that if there is one function Government needs to perform it is the keeping in check of animal spirits, not to mention cleaning up the mess when things go wrong without creating the conditions where moral hazard becomes a real threat. A key passage comes in Chapter 11, which includes the conclusion that "what allows capitalism to function is the regulations which assure" us that when we buy something we are "getting a product with some guarantees."
Chapter 13, which is possibly the one most deserving and in need of elaboration, tackles the issues of minorities, and particularly the predicament of American blacks born into an apparently inexorable cycle of Us and Them. Very bravely in my opinion, at least from an intellectual point of view, they use this chapter to defend the principle of affirmative action programmes, and also to attack the government philosophy which gives a black male in the US a 25% lifetime chance of at some time being incarcerated in prison.
With regard to the writing, the prose throughout is highly readable, and the editing is generally good, although on page 65, when discussing bankers' failure to appreciate the import of the overheating economy in the 1920s, they say, "Thus they did fully appreciate its dangers", where I think the word "not" has been lost.
Readers of Akerlof's more academic works will likely find this particular volume rather lightweight. That has to be to the good, however, given the need to popularise some of the notions espoused here. I won't pretend to be 100% in agreement with their entire thesis, but I'd certainly rather see politicians singing to this hymnsheet than to Friedman's.
2 of 2 people found the following review helpful
5.0 out of 5 stars Important Insights into the Behaviour of Finance,
That the global economy has become unstable is clear; this book is a revelation in understanding why that happened.
This insightful book is a must read in the effort to understand what is going on today in the global economy, and what measures could be effective in stabilizing it.
I heartily recommend it!
6 of 7 people found the following review helpful
5.0 out of 5 stars More than simple economics,
The current crisis is nothing new, similar crises have happened before and are detailed in a highly readable way by the authors.
Capitalism is not dead but needs protection from the ever-present "animal spirits" : the authors give some thoughts on the way forward.
This book is an excellent continuation from Shiller's "Irrational Exuberance" and "The Subprime Solution" : highly recommended.
1 of 1 people found the following review helpful
5.0 out of 5 stars Interesting Read,
The role of psychology in markets should be obvious to any financial professional who has done even a modest amount of thinking and reading. The notion that markets are efficient, and the related idea that they can operate without very much regulation, are so transparently daft to someone who follows the markets day-to-day as to appear straw men. Why then have two distinguished economists written a book to knock them down?
Systematic understanding requires models of the world. Macro-economists have for some years built their models with the assumption that people are motivated by economic considerations and act in their own rational self interest. This approach is not necessarily shown to be valueless by the fact that individuals that we encounter have different motivations and act in a variety of ways; it may be that there is enough truth in the modellers' assumptions as they apply to our aggregate behaviour to allow their models to make reasonably accurate predictions about the economy, and therefore provide useful advice to fiscal and monetary decision-makers.
The point of this book is therefore not to show that individuals are not the ideal economic agents of macroeconomic models, but that the behaviour of human beings, individually and in aggregate, is sufficiently far from that ideal that it cannot be the basis of a sound model. In doing this the authors shed some light, for the non-specialist, on the arguments that economists need to have between themselves in order to improve the field of macroeconomic modelling.
At times I felt that the book was rather wooly, and I have had a stab at understanding why. Akerlof and Shiller quote various pieces of research to back up their views of human nature. But the research still only covers a few people, and it is a leap to generalise its conclusions to aggregate behaviour, even though the generalisations seem to untangle some of the knots that are created by models based on the rational-actor view (it is not established that there will not be greater problems with new models developed from their ideas). The authors are making an appeal to fellow economists to recognise that their existing models are not good enough, arguing that the reason for this is that those models are built on poor assumptions, and suggesting what seems at present to be a plausible alternative set of assumptions to be used in a new model-building effort. An exercise like this is more philosophy than science, and that is why the book feels wooly if you read it expecting the latter: it is a manifesto for a new paradigm, not a new paradigm in itself, because the work of building and testing those new models is yet to be done. After reading the book, I find the appeal persuasive, and hope that the it will be done.
1 of 1 people found the following review helpful
4.0 out of 5 stars convincing, common sense view of the economy,
There are a few predictions that can be tested, so there is a scientific base to the arguments.
Animal Spirits is an enjoyable, quick read, and a good introduction to behavioral economics with almost no equations.
1 of 1 people found the following review helpful
5.0 out of 5 stars A different view on economics,
Akerlof and Shiller give numerous examples of these false assumptions and try to explain a couple of questions regarding the state of the economy with new assumptions as the starting ground.
The succeeded very well in my opinion. I would recommend this book to anyone who is interest in economics but would like to hear a different opinion on economic theoremas.
3 of 4 people found the following review helpful
5.0 out of 5 stars Essential,
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Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by Robert J. Shiller (Hardcover - 29 Jan 2009)