Editor’s note: Meet Tara-Nicholle Nelson at the upcoming Real Estate Connect conference in San Francisco, which runs from Aug. 5-7, 2009. She will be available to meet with conference attendees from 12:30 p.m. to 1:30 p.m. on Thursday, Aug. 6, in the Palace Hotel’s Ralston Room. Click here to send Tara-Nicholle a message.

Book Review
Title: ‘Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Authors: George A. Akerlof and Robert J. Shiller
Publisher: Princeton University Press, 2009; 264 pages; $24.95 list ($16.47 on Amazon.com)

They say you can’t judge a book by its cover, but the Sendak-esque gremlins standing gleefully atop the peaks — and dangling with fright from the valleys — of an economic-cycle chart along the cover of "Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism" do begin to make the case plead within.

The premise of authors George Akerlof and Robert Shiller is that Keynesian macroeconomic theory was only partially adopted via New Deal fiscal policies.

The critical omission? John Maynard Keynes’ central doctrine that many economic activities — including notably unemployment and the jagged-chart rollercoaster of unregulated capitalistic economies on a macro level — are driven by animal spirits: noneconomic or irrational motivations, which have been largely ignored in economic theory from Keynes until now.

Akerlof and Shiller argue persuasively that understanding the role of animal spirits in capitalistic economies renders a moderate level of government regulation of markets absolutely necessary to permit innovation while protecting citizens from their animal spirits and the excesses of unrestrained capitalism, in a manner similar to a not-too-strict and not-too-permissive parent.

In two parts, "Animal Spirits" intentionally and audaciously departs from traditional economic texts which seek to maximize the role of rationality in answering pressing economic "whys." Part One analyzes five individual animal spirits and how they impact consumer economic decision-making, focusing on what Akerlof and Shiller see as the primary irrational motivation behind economic behavior: extremes in confidence. In making a case for a quantifiable confidence multiplier to explain the greater-than-expected economic impacts of both confidence and the lack thereof, the authors deftly weave together:

  • the casual (a dinner conversation about a million-dollar house and common connotations of "confidence," including faith and trust),
  • the academic (traditional economic definitions of confidence and the Latin etiology of the word), and
  • the technical (economic proofs of how overconfidence created the real estate bubble and under-confidence created the credit crunch).

After exploring the role of several other animal spirits in economic decisions, in Part Two Akerlof and Shiller attend to eight pressing economic questions — from why economies fall into depression in the first place to what the authors see as "the great continuing American Dilemma" — racial division, and the issue of persistent poverty among African Americans. The authors’ answers to each question include standard socioeconomic theories, but go further to explore how animal spirits like fairness, corruption, money illusions and narrative (stories) explain both the phenomenon being explored and carve out potential government solutions.

"Animal Spirits" is both an outstanding primer on the shortcomings of classical, rationality-based economic theory in handling modern macroeconomic and social trends and events and a step in the right direction of shoring up those lapses. This book reflects a major step in legitimizing a human and reality-based behavioral economic approach to deconstructing and resolving virtually any macroeconomic — and many social — occurrence or trend.

Click here to read another review of "Animal Spirits," and to hear an audio interview with co-author Robert J. Shiller.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.


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