This weekend, I finally cracked open George Akerlof's and Robert J. Shiller's much-praised "Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism." Now, everywhere I look, I see the central theme reflected.
Popularized by John Maynard Keynes as an explanation for some forms of human economic behavior , the term "animal spirits" is all the rage today, after long succumbing (like the legacy of Keynes himself) to the neoclassical economic view that humans are rational actors. Not according to Keynes: As the economist wrote, human decisions are rarely "the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities;" instead, they are the result of "a spontaneous urge to action." Or, as Akerlof and Shiller quote former GE CEO Jack Welch declaring, they are made "straight from the gut."
And those decisions can just as easily be wrong, as they can be right, no matter how good the gut feels about it.
For example, at Credit Slips, Christian Weller reports the distressing news that "from 2007 to 2008, total retirement wealth in private and public sector pension plans and retirement savings plans dropped by $2.8 trillion (in 2008 dollars)."
That's bad enough, without elaboration. But Weller also observes that traditional pension plans, in general, performed better than newer retirement savings plans such as 401Ks. Why? There are several reasons, but one key factor is that we generally do a pretty poor job of managing our own retirement savings.
Another part of the story is that individuals are not wired for "do-it-yourself" retirement savings plans. Individuals are more likely to be driven by emotions in investing their money than institutional investors are. For instance, individuals will follow fads and thus buy high and sell low and they will put too much money into their employer's stock, among other similar financial decisions that adversely affect their rates of return.
Driven by emotions? Sounds like animal spirits to me.