‘Animal spirits’ in Economics & Mental Accounting in Psychology
What is ‘Animal spirits’ in Economics
This is a term that refers to the emotions and instincts that guide the behaviour of investors and consumers in a market economy. It was coined by British economist John Maynard Keynes in his 1936 book The General Theory of Employment, Interest, and Money, to explain the persistence of economic fluctuations under capitalism. Keynes argued that investment and consumption are often based on how people feel about the overall economy rather than on unbiased, rational analysis of facts. Critics have argued that while people are not perfectly rational, they are not completely guided by emotions either; hence, animal spirits cannot sufficiently explain economic cycles.
A cognitive bias wherein people tend to mentally separate their wealth into different “money jars” that are dedicated exclusively to certain purposes. Such mental accounting can cause people to make irrational decisions that work against their own financial interests. For instance, a person might refuse to use idle money earning negligible interest in his bank account to pay off high-interest debt that he owes, even though doing so would certainly improve his financial condition. The concept was proposed by behavioural economist Richard H. Thaler in “Toward a positive theory of consumer choice”.