Tuning into “animal spirits”

5/14/2009 - Perhaps it’s not the data that’s doing the convincing, but the “animal spirits” that are driving people to spend or save.

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Robert Shiller, a Yale professor of economics and finance, spoke to Kellogg students about how these powerful psychological forces can play a role in moving the markets May 13 at the Kellogg School.

“Animal spirits,” a term coined by economist John Maynard Keynes, refers to a sense of consumer trust and confidence, Shiller said. The term also suggests an awareness of fairness, corruption and faith.

Shiller, whose book, Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism was published in February, argues that the current economy is suffering from a suppression of animal spirits. On an individual level, consumers may feel that they are making a rational choice not to spend money, he noted. Collectively, however, such decisions communicate a lack of trust in the economy. “Emotion is contagious among people,” Shiller said.

Shiller argued that these animal spirits played a role in the collapse of the housing market. The media featured many human interest stories suggesting real estate was a get-rich-quick industry. “Stories or narratives about the economy are like thought-viruses that spread through the economy — a contagion,” Shiller said.

The excitement in the housing market encouraged banks to lower their lending standards, resulting in the subprime mortgage crisis. “Boom periods tend to show a rise in corruption and a decline in good faith in business,” Shiller said. “In an atmosphere of a boom, people feel like they can bend the rules and (get away with) bad behavior.”

“Animal spirits” and the blending of economics and psychology haven’t been well studied, Shiller said. But Shiller hopes his book, co-authored by University of California Professor George A. Akerlof, will encourage economists and other academics to recognize this phenomenon and develop research around it.

Shiller’s speech was the last in the Kellogg Distinguished Lecture Series, which features preeminent thought leaders from the worlds of academia, journalism and business. Previous speakers this year have included 2008 Nobel Laureate Paul Krugman, authors James B. Stewart and Sylvia Nasar, Newsweek Editor Jon Meacham, law professor Lawrence Lessig, and authors Alice Schroeder and Michael Mandelbaum.

The series, sponsored by the Office of the Dean, seeks to address key issues and critical challenges facing today’s leaders, including the financial crisis, emerging global economies and business ethics.