Did you know? Animal Spirits

Investment markets trade on mood as much as on mathematics. Economists use the term ‘animal spirits’ to describe the waves of confidence, fear and excitement that move people to take risks. When animal spirits are strong, investors see opportunity everywhere. They buy shares, fund new ventures and assume that tomorrow will be better than today.

British economist John Maynard Keynes coined the term in 1936, arguing that many economic decisions could not be reduced to cold calculation. Because the future is unknowable, people act on instinct, confidence and stories. A new technology, a falling interest-rate cycle or a run of strong profits can persuade investors that old limits no longer apply.

Without optimism, businesses would not invest and households would not spend. However, optimism can overshoot. The same mood that supports growth can also inflate bubbles, leading to boom-bust cycles. In reverse, Keynes argued that free markets could not self-correct during a recession because human fear paralyses spending. That insight helped to shape Keynesian economics: when private confidence fails, governments must step in.