Animal spirits is an interesting concept that was introduced by economist John Maynard Keynes in 1936. He was one of the most important and influential economists of the 20th century and he based his concept of animal spirits on the Latin phrase “spiritus animalis” which means “the breath that awakens the human mind”.

Animal spirits are often used to explain why people behave irrationally during financial crises. It highlights the role of emotion and herd mentality in financial decisions, particularly those considered risky or ill-considered. The concept of animal spirits was first used to validate the idea that market cycles and changes in investor behavior go hand-in-hand. The idea being that as investor sentiment changes, economic outcomes change too.

In this way, animal spirits are also closely connected to market psychology. They refer to the collective moods of investors in the markets and how this affects their decision-making process. Animal spirits refer to our often irrational reactions to a situation or event that is not otherwise explainable. For example, the irrational buying and selling behavior during periods of market downturns often attributed to animal spirits.

In more practical terms, animal spirits is a reminder to investors and policymakers to be aware of their behavior in determining the market outcomes. It is a recognition that investors’ sentiment and reaction matters and it should not be taken for granted. This is especially true in times of economic turbulence. Investors should be aware of their own emotions and not get caught up in the sometimes irrational actions of other investors.

In conclusion, animal spirits can be used to understand the sometimes irrational and risk-prone behavior of investor during market volatility. It is an important concept to remember when trying to understand financial decision-making and economic outcomes in uncertain environments. Animal spirits is also a reminder that individual reactions and emotions are just as important as the economic situation in determining economic outcomes. This can help investors make informed decisions and minimize risk in a volatile market.