Animal spirits

In Keynesian economics, animal spirits are spontaneous feelings and impulses that shape decisions when outcomes are uncertain and calculation cannot determine what to do.

Fundamental uncertainty: Uncertainty about future outcomes that cannot be reduced to known probabilities. When probabilities cannot guide decisions, confidence and impulse fill the gap.
John Maynard Keynes: British economist whose work reshaped macroeconomics and economic policy in the twentieth century. Keynes gave animal spirits its influential economic meaning.
Business cycle: Recurring fluctuations in economic activity, including expansions and contractions. Shifts in animal spirits can contribute to cycles in investment and output.
Expected utility theory: A model of choice that represents preferences over uncertain outcomes using probability-weighted utility. It formalizes calculated choices where Keynes emphasized impulses under uncertainty.
Business confidence: Businesses’ judgments about economic prospects and the conditions for investment and production. Animal spirits appear in the confidence that prompts firms to invest.
The General Theory of Employment, Interest and Money: Keynes’s 1936 book explaining employment and output through aggregate demand, money, and expectations. The book’s chapter on long-term expectations introduces animal spirits.
Financial market sentiment: The prevailing optimism or pessimism shaping investors’ assessments and trading decisions. Market sentiment shows how collective emotion can influence asset prices.
Risk: Exposure to uncertain outcomes whose probabilities can be estimated or specified. Keynes distinguished calculable risk from uncertainty that leaves judgment unsettled.
Investment: The purchase or creation of assets intended to produce future income or services. Keynes connected fluctuations in investment to shifts in entrepreneurial confidence.
Long-term expectations: Beliefs about future returns that guide present decisions, especially investment. Keynes used animal spirits to explain how these expectations are formed.

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