We are often told to trust our instincts, Albert Einstein has always spoken about the brute substance intuition offers. Our intuition is in use every day, whenever we are faced with options and choices, more often than not, our intuition decides what to make for breakfast or what to wear for the day (well, we needn’t worry about that these days!). Management books might propagate a formal decision-making mechanism but a lot of times we hear success stories that reiterate the beauty of following your gut. Especially in times of uncertainty, when one cannot predict a methodical outcome, a manager would be expected to go with his instinct, Keynes tried to come up with a name for this phenomenon, he called it “Animal Spirits”, he ascertained that investors might behave irrationally when faced with a volatile or collapsing market.
”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
This theory is essentially a response to Adam Smith’s belief of prevailing rationality in the market, he focused on the impact of complete rationality on the market while Keynes spoke about instinctive decisions which more clearly represents decision making.
Essentially, if spirits are low in the market i.e presence of fear & uncertainty, market participants let go of all rationality and follow the herd into oblivion. On the other hand, when spirits are high and the players are confident about the market, it might lead to a boom. The pandemic has well shown us the true intensity of herd behavior, record crashes & stock market runs have been rampant all around the world. This uncertainty and the associated economic losses have caused markets to become volatile and unpredictable. With the Indian economy already in shambles before the lockdown, the pandemic has injured it further. Reduced consumer expenditure amid fear of job losses and reduced incomes led to panic, in other words, “Animal Spirits”. The International Monetary Fund predicts the Indian economy to contract4.5% 1, a downturn in investment activity didn’t help the situation either. Keynes wrote that animal spirits prompt a person to make economic decisions. For example, a person does not really know the return on investment 10 years later, but still makes an investment. The rational mind would actually stop this investment; it happens, believes Keynes, only due to animal spirits.
Raghuram Rajan has spoken about the reforms that usually trigger the so-called “Animal Spirits”, he has also shown us how irrationality can be used to revive the failing economy and get back the optimism that is usually on display. India has been termed as a major hub for potential FDI and even with the negative stigma associated with foreign trade all across the globe & as a result, India’s FDI has remained buoyant. Moreover, investments from companies like Google, Amazon, and Facebook have helped in boosting investor confidence. Such sentiments are what Keynes described as Animal Spirits and they remain crucial in overturning the economic loss that has plagued us along with the disease.
References :
“Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” by GEORGE A. AKERLOF AND ROBERT J. SHILLER
Yukta is an Economics enthusiast and is pursuing a degree in Management Studies. She has grown up surrounded by books and tries to incorporate a creative style to her writing as well.
