Opening the black box of investment expectations: an empirical inquiry into animal spirits

When it comes to investment expectations, entrepreneurs rely on their gut feelings, aka “animal spirits.” And yet, in most models, animal spirits are seen as “black box” irrationality that would cause random shocks. The purpose of this paper is to open this black box in order to comprehend how animal spirits work. First, we draw on Keynes’s texts and insights from psychology and neuroscience so as to elaborate a theoretical model of animal spirits. It seems they estimate prospective yields in an analogical and emotional fashion. Second, we implement a field study (presumably the first of its kind) in the context of a very realistic business game simulation in order to assess the animal spirits of would-be entrepreneurs and see whether they weigh more in investment expectations than the real factors so far outlined by the literature (profits, debt, the rate of capacity utilization, etc.). We find that emotions play a prominent role in investment decisions and that some of them enable entrepreneurs to cope with radical uncertainty.