Animal Spirits
Keynes's term for the instinctive optimism that drives economic and investment activity beyond what calculation justifies.
How it is identified
Test: investment and risk-taking rise or fall more than changes in measurable expected returns can explain
Unit
qualitative
In depth
Keynes argued that most decisions to do something positive can only be taken as a result of spontaneous optimism rather than mathematical expectation, because the future is genuinely unknowable rather than merely uncertain. The concept explains why investment collapses in a downturn faster than any change in expected returns warrants, and why it recovers before conditions justify it. It is a description of a phenomenon rather than a measurable variable, which is both its usefulness and its limitation. Modern behavioural economics has given it more structure through work on sentiment and confidence.
Worked example
Corporate capital expenditure falls 40% in a year when interest rates and demand have moved far less. The arithmetic of any single project barely changed; the willingness to commit to a multi-year outcome did.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Animal Spirits” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.