NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS
2
ANIMAL
T
he phrase "Animal Spirits" is attributed
to John Maynard Keynes, perhaps the most
influential economist of the 20th Century.
In his 1936 The General Theory of Employment,
Interest and Money, Keynes posits that many
of our decisions are driven 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."
1
Referenced by writers
as diverse as Thomas Hobbes, Jane Austen, and
Arthur Conan Doyle, animal spirits as a driver
of economic expansion is based on Keynes'
usage. It describes both a basis for optimism
through increased risk taking, as well as for
concern from excess exuberance.
Forty years after Keynes' magnum opus, scientists were
attempting to explain the enormous gaps in the fossil
record that seemed to contradict the continuous and
gradual evolutionary change at the species level assumed
by Charles Darwin. Stephen Jay Gould and Eldridge
Niles suggested that biological change does not occur
on a regular but on a mostly discontinuous manner with
long periods of stasis punctuated by large change during
shorter periods in geologic terms. They coined the phrase
"punctuated equilibrium" to describe their theory, which
has become very influential in evolutionary biology.
2
The
theory reflects our common sense impression that during
long periods of time little changes and then everything
appears to change at once.
Following the surprises of 2016—from Brexit to the US
presidential election—the two metaphors of animal
spirits and punctuated equilibrium provide a description
of recent events. After initially falling after the November
elections, the US equity markets have soared to a long
series of new record levels. This climb has continued into
1Q and interest rates have increased, reflecting higher
growth and inflation expectations. Heightened growth
expectations did not follow from the disappointing 4Q