Animal spirits refers to the role of confidence, sentiment, and instinctive optimism or pessimism in economic decisions. In macroeconomics, the idea is that investment and spending do not move only because of mechanically calculated fundamentals. They also move because people form judgments under uncertainty.
Keynesian Logic
John Maynard Keynes used the term to explain why firms undertake long-term investment even when the future is highly uncertain. If every decision required complete probabilistic knowledge, many investments would be postponed. Animal spirits captures the fact that business decisions often depend on confidence as well as calculation.
Why It Matters
Shifts in sentiment can amplify the business cycle. When firms and households become more optimistic, they may invest, hire, and spend more, which raises aggregate demand. When confidence collapses, they may pull back sharply, deepening downturns.
That does not mean sentiment is irrational noise in every case. It means the economy can move through expectations and psychology when information is incomplete and outcomes are uncertain.
Practical Interpretation
Economists use the idea of animal spirits to interpret waves of optimism in asset markets, sudden declines in investment, and situations where confidence effects appear larger than changes in measured fundamentals alone would predict.