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on 13 March 2014
Though animal spirits, as pioneered by Keynes, is a very interesting concept, I found that this book does not really add anything meaningful to the conversation as far as ordinary people are concerned. Nevertheless I would recommend this book to those wishing to get into the spirit of understanding how markets reflect human behaviour.
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on 4 January 2013
If you are trying to get into understanding the problems of Macro-economics then this is an interesting read and it presents a novel approach, but it was a bit shallow and repetitive for me. I guess you don't have to read the whole thing to get the message, 'economics fails because economists assume human beings are rational'. But if you do decide to skip, after reading the first few chapters, be sure drop back in for the last chapter which is pretty solid. It is a relatively easy read and worth a few hours I think.
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on 20 April 2009
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.
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on 1 March 2009
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.
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on 7 April 2014
The thinking is obviously top drawer. Somehow however you end up feeling it doesn't measure up to the gravity of the situation.
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TOP 1000 REVIEWERon 18 August 2014
This book is aptly subtitled "How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism". Much as economics would like to be a science, it is still firmly in the realm of social science. For all the econometrics and complex computer models it is still at its heart about the behaviour of people. And people are only rational and self-interested on the surface; below this are their emotions, their sense of fairness, culture, fear and greed. No economist has ever produced a comprehensive mathematical model for these attributes.

The term "animal spirits" comes from the Latin "spiritus animalis", the life force. It has been adopted and adapted by economists to describe the human factor. The economist John Maynard Keynes incorporated it into his work, a fact overlooked by many later Keynesians but not by the authors of this book.

This is an economics book without graphs, tables or equations, making it an accessible read, but it is still a book about economics and the dismal science cannot be avoided. The ability to construct quantifiable theories is not enough to describe economics and economic behaviour. Indeed, basing government policy on purely quantifiable theories can be dangerous. To put the proper emphasis on the soft, unquantifiable factors that drive the economy is what this book is all about.

THE BOOK has 176 pages plus 22 pages of Notes and 20 pages of References. It is split into two parts: "Animal Spirits" and "Eight Questions and their Answers". These questions are:

+ Why Do Economies Fall into Depression?
+ Why Do Central Bankers Have Power over the Economy?
+ Why Are There People Who Cannot Find a Job?
+ Why Is There a Trade-off between Inflation and Unemployment in the Long Run?
+ Why Is Saving For the Future So Arbitrary?
+ Why Are Financial Prices and Corporate Investments So Volatile?
+ Why Do Real Estate Markets Go Through Cycles?
+ Why Is There Special Poverty among Minorities?

RECOMMENDATIONS: Everyone is involved in the economy so this book should have wide appeal, but more specifically it should be of use to students of psychology and economics. Graduate economists will find it too populist. Neo-classical economists will find it heretical. Marxists will find that it confirms the view that capitalism is inherently unstable and will inevitably collapse. Conservatives will regard this book as just a collection of woolly liberal ideas with no real substance.

Galbraith, John Kenneth The Great Crash 1929
Keynes, John Maynard The General Theory of Employment, Interest and Money
Kindleberger, Charles Manias, Panics and Crashes
Lamont, Michele The Dignity of Working Men
Minsky, Hyman Can It Happen Again?: Essays on Instability and Finance
Shiller, Robert Irrational Exuberance
Shiller, Robert The Subprime Solution
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on 11 March 2009
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.
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VINE VOICEon 29 March 2010
What I found interesting about the book was not the authors' pointing out that the economy doesn't always function rationally (one only needs eyes and half a brain to work that out), but their description of the elements that they suggest make up at least part of that irrationality. Akerlof and Shiller's classification of 'animal spirits' into confidence, fairness, corruption and bad faith, money illusion and stories strikes me as a useful tool for analysing and understanding economic events.

The book doesn't put forward very specific solutions for 'replacing rather than repairing Humpty Dumpty', but is well worth reading nonetheless.
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on 4 December 2010
'Animal Spirits' is one of a number of recent books that use the financial crisis of 2008-9 as an opportunity to reflect on the shortcomings of academic economists - almost none of whom foresaw those events - and suggest policy directions for the future. This is not a 'what happened?' analysis of the crisis, but a study of the implications of those events for economists and those who depend on their judgements.

The authors begin from Keynes's almost off-hand remark about 'animal spirits' - the irrational, the non-economic, the unquantifiable - as a factor in economic matters. They point out that academic economics, aspiring to the status of a science, has always had a problem with non-economic motivations and irrational behaviour, and has in effect tried to behave as though it were unquestionably true that economic actors are always rational maximisers of personal advantage. Akerlof and Shiller note that this approach - building up macroeconomic theory from the relatively well-understood classical theory of simple markets - has failed to account for many real macroeconomic phenomena. In particular, this style of thinking cannot explain the volatility that causes potentially devastating crises.

In the first part of their book, Akerlof and Shiller propose a five-fold division or expansion of Keynes's blanket notion of 'animal spirits'. These factors are: confidence; fairness; corruption and antisocial behaviour; money illusion; and stories. The authors argue that economic agents are subject to a variety of pressures from non-economic motives - such as the sense of whether an outcome is fair rather than merely rational - and irrational motives - such as panic. They harbour inaccurate perceptions of value - money illusion. They have a sense of the past, and project future outcomes - in other words, they make narratives that subsequently condition their actions. When these narratives change, actions change.

Having outlined these factors, Akerlof and Shiller move in Part Two to a consideration of eight specific questions. They contend that conventional macroeconomic theory cannot answer these questions because it neglects the 'animal spirit' factors. These questions range from the impersonal and technical - why do economies fall into depression? - to the deeply personal - why are there people who cannot find a job? In each instance, they seek to demonstrate that an analysis that acknowledges the limited utility of 'rational agent' approaches can offer an explanation of phenomena that are inexplicable, even embarrassing, within that paradigm.

The authors conclude briefly with a call for the reform of economics to take account of real-world phenomena and historical data and produce a credible macroeconomics. They reject out of hand the exploded dogma that capitalist markets require no regulation, and accept that government is precisely the appropriate arbiter between the market and the larger needs of society. One of the strengths of the book is that both authors - one a Nobel winner - are convinced proponents of the free market, and so are not vulnerable to the knee-jerk accusation of attempting to introduce 'socialism' - however understood - by the back door.

The book is relatively short - 176 pages of text, plus notes and index - and makes use of almost no mathematics or visual aids. There were moments when I felt that there was an uncertainty of tone - as if the authors had briefly forgotten that they were writing primarily for an unversed audience - but these are few. Any intelligent reader who is prepared to read carefully will glean a great deal of useful insight. My only real criticism would be that the authors could have gone further. Accordingly, for a more trenchant analysis I would supplement a reading of this book with John Quiggin's Zombie Economics: How Dead Ideas Still Walk among Us, and Raghuram Rajan's Fault Lines: How Hidden Fractures Still Threaten the World Economy, though their ultimate conclusions are broadly similar.
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on 22 August 2009
Judging from the avalanche of books with the implied sub-title "What went wrong and how to fix it" economists too need to make a fast buck to recover something from the devastation of their pension funds.

The authors (one a Nobel, no less) identify the cause of the crash in "animal spirits", a throwaway remark by J M Keynes who proposed that investment decisions were much less rational and calculating than the deciders would have you believe.

Of course, Keynes, Akerlof and Shiller are right. Animal spirits do animate us. How else to explain the wild gyrations of asset markets and our total surprise to find that a trend is jn fact (as I think Keynes remarked) "a thing that goes on until it stops" but NOT something that goes on forever.

So the authors make a list, and explain what went wrong. This list is basically a round-up of behavioural economics, that just-so story for brainy people with regression analysis tools.

At least Akerlof and Shiller have the grace to acknowledge that they didn't see the crash coming. So what is their response to the "how to fix it" question?

Akerlof seems fairly cautious; more regulation. Shiller seems to favour a more full-blown socialism. It's fairly easy to identify which author wrote which bit, as the writing styles are uneven, with Akerlof more obscure but more interesting and Shiller shriller and clearer.

This a shallow and trashy bit of crash-exploitation econom-porn. The authors seem quite genial coves, so I don't entirely begrudge them the time and money I wasted. Hint if you're in a bookshop: the conclusion is adequate to sum all the ideas in the book and can be read while browsing.

OK, I'll try to be fair. There is one idea that I hadn't come across before. "Wage efficiency theory" posits that employment contracts aren't like transactions, they're more like relationships, because the contract is struck at the beginning of a time period. The result is that employees are actually paid a bit more than the going rate (and by implication, their worth).

Typically, this fascinating idea remains undeveloped, apart from its power to explain persistent unemployment. I like the idea that not only was Marx wrong in practice, and wrong in theory (Labour theory of value) but didn't go far enough. The further implication, of course, is that if labour is overpaid, some other factor of production must be underpaid. Indeed, Gregory Clark, an obscure but interesting quantitative historical economist A Farewell to Alms: A Brief Economic History of the World (Princeton Economic History of the Western World)shows that return on capital has been declining for 800 years. And the further implication, of course, is that if the workers are overpaid, maybe they should be required to give a "bonus" periodically to the employer. Of course they don't, and the result is occasional bankruptcy with no redundancy provision and an underfunded pension scheme.
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