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60 of 68 people found the following review helpful:
4.0 out of 5 stars
Book Review: Animal Spirits, May 26, 2009
Economists, in pursuit of mathematical precision, seem to have forgotten that not everything can be easily counted. Traditional economic theory centers on the premise that people make perfectly rational decisions. People, however, are not so rational. Despite many attempts, not every variable that goes into our decision-making process can be easily quantified, weighted, and stuffed into a formula. As any non-economist knows psychology -- and its hard to measure variables -- plays a large role in how people make decisions.
George Akerlof and Robert Shiller's book, Animal Spirits, offers an accessible look at how traditional economics can be expanded by incorporating some basic concepts from psychology. The term "animal spirits," originally coined John Maynard Keynes in the 1930's, describes how impulses and emotions naturally lead to economic boom and bust cycles. Traditional economists seem to have ignored even the most primitive of these spirits.
Economists create impressively complex formulas attempting to accurately describe the state of the economy and predict future trends. However, there are just too many unquantifiable variables - feelings, emotions, intuition, and confidence- to accurately incorporate all available information into a simple neat equation. Incorporating psychology into economics may not sound like much of a breakthrough. But Akerlof and Shiller have stepped outside of current economic thought to gently nudge animal spirits back to the discipline.
The first part of the book offers five examples of animal spirits: confidence; corruption; money illusion; stories; and fairness. While there are many more psychological factors at work in decisions, these offer a step in the right direction. A quick look at the internet bubble shows how these spirits can unknowingly influence our decisions.
In the late 1990's, investors were confident in a "new economy" and drove the price of internet related stocks up far more than a reasonable estimation of their economic prospects would justify. As the stock market increased in value, we entered a positive-feedback cycle from our investment decisions that further increased our confidence. As confidence rose so did the markets. In the end, we all know how this cycle turned out.
In the second part of the book Akerlof and Shiller answer some big questions calling attention to the role of the animal spirits. Why do economies fall into depression? Why is saving for the future so arbitrary? Why is there unemployment? Why are financial prices so volatile? Why do real estate markets go through cycles? Why is there special poverty amongst minorities?
The book offers persuasive, well-researched, prose that challenges the conventional wisdom that underlines much of existing economic theory. In attempting to answer some large fundamental economic questions by calling attention to psychological influences, the book offers a first glimpse of what economic solutions might look like in the future.
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292 of 353 people found the following review helpful:
1.0 out of 5 stars
Disappointing, July 16, 2009
Given such accomplished economists, and being sympathetic to behavioral economics I expected better from this volume. The book has obviously been rushed to print. There are numerous errors. Just to give a few examples:
They present Adam Smith as the father of the rational economic man model when in fact he was the author of "The Theory of Moral Sentiments" (a masterwork of psychology) and certainly never claimed that emotions did not matter for economics.
They present Keynes as having "animal spirits" at the center of his theories which is not true. They do not even give the background to the phrase, which was more than two hundred years old at the time Keynes wrote.
They completely misrepresent the work of Milton Friedman generally and with respect to the Great Depression specifically. They even get his ideas about money illusion wrong. They seem hopelessly confused about the difference between Friedman and the later "rational expectations" theory. In fact there is surprisingly little about modern macroeconomics including modern Keynesian thought.
Did they even read Friedman's great work on the Monetary History of the United States? They make a single reference in passing to it in the text. It is extremely meticulous in tracking the events of the Great Depression. Even J.K. Galbraith highly praised it as a work of empirical research.
Although they discuss bubbles and speculation the general reader would finish the book with no idea that experimental economists have been replicating and studying these phenomena in the lab for over 20 years and have discovered many things about what contributes to them. This is part of the authors' pattern of setting up mainstream economics as a straw man with no concern for psychology.
A more fundamental flaw is that they never make a persuasive case that animal spirits are the core of the problem. Yes there are many historical anecdotes and stories - but there is no overall scheme or theory in this book. It's a mess of disconnected thoughts, stories, anecdotes etc..
On a final note, there is a degree of condescension to the general reader which is quite irritating. For example, in discussing poker in the introduction we are informed that players often try to deceive their opponents and this is called ... "bluffing." (!)
In summary, a book that was rushed to market.
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53 of 67 people found the following review helpful:
5.0 out of 5 stars
Including the Irrational in Macroeconomics, March 25, 2009
"Animal Spirits" is an important contribution to rethinking economic theory, particularly macroeconomic theory, so that it better takes account of human irrationality.
The central argument of the book is that various human emotions - overconfidence, unwarranted pessimism, a sense of fairness, and stigma effects - can have important aggregate effects on the economy. Economists have often tended to overlook these factors, for several reasons: the irrational is difficult to model, and it has sometimes been assumed that these "irrationalities" will average out or be weeded out by the market. But Akerlof and Shiller argue that frequently such "animal spirits" can result in self-reinforcing cycles of either boom or bust. Irrationality is not only not tamed by the market, but can even be reinforced.
Akerlof and Shiller consider varied topics in this book, including determinants of savings rates and wages, and high African-American poverty. However, most of the book focuses on how "animal spirits" might help better explain the business cycle. Their book is opportune, as the current downturn is plausibly explained as the result of the excesses of an unregulated speculative fever in housing and related investments. Their book includes a valuable postscript to one of the chapters that analyzes possible responses to the current financial crisis.
I think this book is best suited to an audience that is reasonably well-aware of economic ideas about markets and the macroeconomy. This of course includes professional economists as well as many policy wonks interested in macroeconomic policy. It would also be a valuable corrective for a wider audience that holds the belief that the market is always in the aggregate efficient. This book supplies one more valuable argument for some government intervention in the market: the need for regulation to discourage various sorts of speculative bubbles.
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