Book Affair: Animal Spirits

---- George Akerlof, Robert Shiller

I have procrastinated on writing a review on this book, mainly because I hardly enjoyed reading it for any of its content to have lasting memory in my brain, and I didn’t have an easy time trying to recollect what I thought to be the gist of the book.Well, I guess had it not been on our reading list I would probably have passed it. Nonetheless, having decided to take reading list seriously, and not wanting to stumble on the first book I picked, it is necessary that the following paragraphs are given attention.

Akerlof is a respected economist who has won Nobel Prize for uncovering the theory of asymmetric information as another market failure, famously known as the “lemon problem”. That makes up for his relative lack of talent in presenting economic insights in an interesting way.

Akerlof and Shiller discuss the themes of corruption, stories, and feeling of fairness, exuberance of confidence and the lack of it, as forces shaping economic decisions or the absence of it. They highlight the importance of emotions and traits essentially tied to human sentiments, as opposed to the conventional wisdom of perfect rationality, in causing economic phenomenon we struggle to explain.

With the backing of experiments and historical data, Akerlof and Shiller are able to explain how our delusional beliefs, vulnerability to stories and the concerns over fairness tend to override economic consequences more than we have given credit for. Markets where such random fluctuations are rampant are obviously infested with “animal spirits”, and they include the stock market (confidence), property market (stories) and financial products (corruption).

Just to be more specific, human beings are forgetful. Contrary to “learning from mistakes”, we are blissfully oblivious of the past, and thus swing to stories and word-of-mouth information. Our delusions

On top of introducing unconventional ideas, the book sheds some light on economic forces that we are already familiar with and have probably taken granted for. For example, the authors explain the reasons why central banks have overwhelming power in the control of money supply. It has never puzzled me that just by withdrawing from and supplying the market with limited amount of money, the central banks are able to influence interest rate. The truth behind this magical trick should be the reward for a curious mind, and therefore, I should not spoil the fun of it.

When exploring the moral ground of current financial products, the authors invoke some reflections of the demerits of capitalism and call for greater regulations in such vulnerable markets.  That people, inherently governed by our “animal spirits”, would be tempted to devise ways to sell snake oil to the unsuspecting when given a chance in laissez faire.

Human beings are forgetful. They forgot how the previous depression started, and end up in another depression just like the previous one. Yet stories live to tell the tales of the past, to such an extent that even in modern time descendants  are still psychologically framed in the context of past sufferings of unfair treatment, upon which their world view and self-identity are built. This explains why there has been stubborn poverty within certain minority group in a society.

Akerlof and Shiller hope that as soon as we start treating those turbulent floods of emotions as part of economic reasoning, we would repeat less of past tragedies, and government would be encouraged to harness that animal spirits and channel them into constructive forces in building a more robust economy.