Animal spirits are involved in a whole lot of our decision making. The famous economist, John Maynard Keynes knew this all along.
We make countless decisions guided by peer pressure, often regretting them in hindsight. For example, investing in stocks, experimenting with drugs, going to college, and even political stances are all activities influenced by what we think other people will do or think they will do.
A General Theory, indeed
In his game-changing The General Theory of Employment, Interest and Money, Keynes defines what he means by “animal spirits”— a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. We do stuff simply because we can’t sit still.
Keynes also famously likened our investment decisions to guessing the six prettiest faces in a fictional newspaper beauty contest. The beauty contest is won when the person that picks the six prettiest faces out of a hundred photographs. What ensues is a bit of inception-like decision making. If we think about it, we’re not really picking the faces we think are pretty, but the faces we think that other people think are pretty. If we’re really savvy, we would pick the faces that we think that other people think that other people think are pretty.
Investing in Spotify
For example, you don’t invest in Spotify because you know the underlying market characteristics. You invest because you think other people know the underlying market characteristics and you think other people will also invest in Spotify because they think the same thing. Oh, and because all your friends are talking about how Spotify is gonna blow up as they listen to their favorite artists.
Student Debt Crisis
Between 2000 and 2018, college enrollment has increased by more than 30 percent! This can be seen as a success as more students are pursuing higher education which can lead to higher paying jobs. But underneath the rising enrollment is a student loan crisis. More than 44 million Americans carry $1.48 trillion in student loan debt. The student loan default rate—the amount of people that have skipped at least nine months of loan payments—is at 11 percent. If we take out active students who have taken out loans but have deferred payments, analysts estimate the default rate to be closer to 22 percent!
This crisis is largely a result of peer pressure, much like Keynes’ animal spirits and the beauty contest. Though there are some clear benefits of a college education, these benefits are often exaggerated due to the pressure put on kids by their parents, friends, and teachers. Not to mention, the government continually encouraging kids to get college education with subsidized loans and grants.
I certainly remember the intense social pressure when I decided to not go to college and instead jump into the workforce. The fact that I had no student loan package or scholarships, made the cost of going to college very clear. I had to pay up immediately. Had I applied for student loans, won some scholarships, or had my parents pay for my tuition, I wouldn’t have calculated the costs and benefits of going to college. I would have been more easily swayed by my animal spirits. I might have gone to college with my friends, without having any kind of real career direction in mind.
I did go to college eventually. Eight years later, I went out of social pressure, not because of calculated costs and benefits. To be sure, not all social pressure is bad. But, we’d be lying if we were to say that we make decisions entirely of our own volition. We certainly aren’t considering the costs and benefits to our own lives as carefully as we think.
Stressed about Politics
The latest American Psychological Association Survey finds “the future of the nation” as the #1 cause of stress in 63% of the respondents. C’mon, y’all. Our social media feeds are filled with political banter (unless you’ve taken the time to fine tune the feed to only display cute animal videos and delicious recipes…I would highly recommend it).
This is attributed to Keynes’ illustrations. If a politician says something the “average friend” is in favor of, our animal spirits would influence us to support that politician. Not only that, but we’ll likely look at the other political competitors with a bias. What’s more is that if we don’t get stressed out about the current administration, then how will we be viewed in social interactions? How will we be able to get involved in the discussion? What will our #NeverTrump managers think of us when they find out we voted for the real-estate mogul?
How we vote, which political party we align with, and how we share our stances, are mostly based on animal spirits and Keynes’ beauty contest. Like wolves, we start howling as soon as we hear another wolf start howling. We share our views more because that’s what we think our peers want than an actual understanding of the political process and/or the costs and benefits. It’s not our fault. There’s too much to know and not enough time in the day to find out.
We’re still rational, folks.
We are still making quick calculations of costs and benefits within our decisions. We are rational human beings. However, what we think other people think definitely infiltrates our decision making process. For better or worse, how peer pressure affects us, whether negatively or positively, depends on the situation.
Our animal spirits become prevalent in areas with tons of uncertainty and not enough time to calculate potential outcomes accurately. This is one insight that made Keynes a star long ago.