Animal Spirits

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Definition of 'Animal Spirits'

Animal spirits is a term used in economics to describe the irrational and unpredictable behavior of investors and consumers. It is often used to explain sudden and unexpected changes in the stock market or other financial markets.

The term was first coined by John Maynard Keynes in his book "The General Theory of Employment, Interest and Money" (1936). Keynes argued that animal spirits are one of the main reasons why the economy does not always behave in a rational way. He believed that investors and consumers are often driven by emotions, such as fear and greed, rather than by logic and reason.

Keynes believed that animal spirits can lead to booms and busts in the economy. During a boom, investors and consumers become overly optimistic and start to take on too much risk. This can lead to a bubble in the stock market or other asset prices. When the bubble bursts, investors and consumers become pessimistic and start to pull back on spending. This can lead to a recession.

Animal spirits are difficult to measure, but they are thought to be an important factor in economic fluctuations. Economists are still trying to understand how animal spirits work and how they can be managed.

Here are some examples of animal spirits in action:

* In the 1990s, there was a boom in the dot-com industry. Investors were irrationally optimistic about the potential of the internet, and they invested heavily in dot-com companies. This led to a bubble in the dot-com stock market. When the bubble burst, many dot-com companies went bankrupt, and investors lost billions of dollars.
* In 2008, there was a financial crisis. Banks and other financial institutions made risky loans to borrowers who could not afford to repay them. This led to a housing bubble, which burst in 2008. The financial crisis led to a recession, which caused millions of people to lose their jobs.

Animal spirits can have a significant impact on the economy. They can lead to booms and busts, and they can make it difficult for policymakers to predict and manage the economy.

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