“Even apart from the instability due to speculation, there is instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, where moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

(Keynes, The General Theory of Employment, Interest, and Money)


According to Todd Buchholz’s New Ideas From Dead Economists, Keynes’ Animal Spirits “are irrational forces that impel entrepreneurs and speculators forward…[and] incite much investment” in the face of uncertainty. These spirits guide individuals to pursue their self-interests, even when those pursuits are irrational. The following post will vindicate Keynes’ idea of Animal Spirits by exploring anecdotes that suggest these spirits drive many of the decisions we make each day and that we’ve seen made throughout history.


We’ve all used the saying “I’ve got a hunch that…”. Have you ever wondered where the confidence that statement implies comes from? It definitely isn’t rooted in careful scrutiny of path outcomes, or simulation and sensitivity analyses. Hunches aren’t analyzed; they’re hunches. As humans, we don’t just make hunches about what’s cooking for dinner or who will win the football game – we also allow hunches to guide decisions of all magnitudes. “Former General Electric CEO Jack Welch once said he had little use for rationally analytical business plans and projections. He said major business decisions come ‘straight from the gut’.” His autobiography is even titled Jack: Straight from the Gut.


From Keynes’ perspective he observed that – due to Animal Spirits – financial markets function more like British beauty pageants than efficient marketplaces. He witnessed that prices move much more from changes in investor expectations of other investors’ expectations than they do from fundamental changes. This phenomenon manifested itself most clearly during the dotcom bubble of the late ‘90s and 2000. Irrational exuberance regarding the Internet’s potential and the abilities of Internet companies to turn profits led to astronomical valuations and to-good-to-be-true returns – up until March 2000, when the house of cards came crashing down. The same themes can be found across bubbles of all kinds, and at their core are Keynes’ Animal Spirits.


Because of humans’ tendency to succumb to our Animal Spirits, Keynes’ believes that our economy and markets need government regulation to remain on track. George Akerlof and Robert Shiller argue that “without government intervention, employment levels will at times swing massively, financial markets will fall into chaos, scoundrels will flourish, and huge numbers of people will live in misery.” If we fail to realize the significance of Animal Spirits in our human psychology, and instead assume that humans are totally rational and act as Adam Smith purported, we would push out government all together, to our demise. A historic example of the oversight of Animal Spirits is the Financial Crisis of 2008. Returning to Akerlof and Shiller again, “for more than 70 years [the safeguards set up by the Roosevelt administration to protect the public from the excesses of free enterprise] worked, but then complexity provided a way to evade regulation.” Among other factors, unregulated securitized products and derivatives combined with corrupt incentive structures ultimately led to the ’08 crisis. Bankers left to their own devices yielded to their innate Animal Spirits, leading to a sub-optimal outcome for us all.


While Keynes’ didn’t contend that capitalistic outcomes were inferior to other economic regimes, he was wary of how a purely capitalistic society would handle its freedom. His concerns that human capitulation to our Animal Spirits would harm society have manifested themselves time after time.

John Maynard Keynes Vindication: Animal Spirits