“Animal spirits” is a term coined by the economist John Maynard Keynes in his work “The General Theory of Employment, Interest, and Money,” published in 1936. The concept refers to the non-rational factors or psychological factors that influence economic decision-making, particularly in the context of investment and consumption.

Key points about animal spirits:

1. **Emotional and Psychological Factors:**
– Animal spirits encompass the emotional and psychological factors that affect economic decisions, going beyond purely rational and objective considerations. These factors include confidence, optimism, fear, and other emotions that influence economic behavior.

2. **Uncertainty and Speculation:**
– Animal spirits are often associated with situations of uncertainty and speculation. In times of uncertainty, individuals and businesses may rely more on instincts, hunches, or collective sentiments rather than objective data when making economic decisions.

3. **Impact on Investment and Consumption:**
– Keynes argued that fluctuations in animal spirits could lead to variations in investment and consumption levels, contributing to economic cycles. For example, during periods of high confidence and optimism, businesses may be more willing to invest, and consumers may be more inclined to spend, stimulating economic growth.

4. **Herd Behavior:**
– Animal spirits are linked to the concept of herd behavior, where individuals make decisions based on the actions of others rather than independent analysis. This herd behavior can contribute to market bubbles and crashes.

5. **Role in Economic Downturns and Recoveries:**
– In times of economic downturns, a decline in animal spirits, characterized by reduced confidence and increased pessimism, can lead to a decrease in investment and consumption, exacerbating the economic downturn. Conversely, during recoveries, improved animal spirits can contribute to economic expansion.

6. **Policy Implications:**
– Keynes suggested that government policies, such as fiscal and monetary measures, could influence animal spirits and help stabilize the economy. For example, counter-cyclical policies might aim to boost confidence and stimulate investment during economic downturns.

7. **Investor Sentiment:**
– In financial markets, the concept of animal spirits is often associated with investor sentiment. Positive sentiment can lead to bullish markets, while negative sentiment can result in bearish markets.

8. **Subjectivity and Perception:**
– Animal spirits highlight the subjective and perceptual aspects of economic decision-making. Perception and confidence can sometimes be as influential as objective economic indicators in shaping economic behavior.

Understanding animal spirits is important for economists, policymakers, and investors because it provides insights into the psychological factors that drive economic activity. Economic models that consider both rational and non-rational elements help provide a more comprehensive understanding of the dynamics of markets and the economy.