Animal spirits is a term to describe the influence of instincts, personality and emotions on economics. The term is attributed to John Maynard Keynes perhaps the most influential economist of the 20th century. Animal spirits most often comes up to explain irrational behavior in investing. The following are common examples.
Action vs InactionInvestors may get the urge to buy or sell in the presence of large price movements when they have no reason to believe that fundamentals have changed one way or another. Keynes himself described animal spirits as "a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
FearThe tendency for the instinct and emotion of fear to cause investors to sell.
Fear of Missing OutWhen markets move up quickly or consistently people may rush to buy out of a fear of missing out. This is phenomena is also commonly described as greed.
TrustInvestors may overpay for trust in management as they fear uncertainty. In some cases, trust is based on biases. For example, investors tend to have a home bias whereby they are willing to pay more for domestic companies. People also tend to buy companies when they are familiar or passionate about their products. This may occur when the underlying stocks are clearly overvalued with little chance of achieving a reasonable return.
|Definition||The influence of instincts, personality and emotions on economic decisions.|
|Origin of Term|| The General Theory of Employment, Interest and Money, John Maynard Keynes, 1936|
|Value||Avoiding common patterns of investing failure.Identifying irrational prices. |
|Related Concepts||InvestingGreater Fool TheoryEfficient Market Hypothesis|
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