What Keynes encapsulates in his phrase ‘animal spirits’ is the essence of motivation driving human action. Although a basic tenet of neo-classical economic theory is that human beings are rational and that they evaluate options in a logical and self-interested manner, studies of behavioural economics have since emerged to demonstrate that, in fact, human beings can be very irrational for a very long time under certain circumstances.2 We can be perverse.
Surveys help to capture the idiosyncrasies of our behavioural traits that lead to outcomes you would not necessarily expect under ‘normal’ circumstances. They provide us with a timely snapshot of sentiment and opinion, and the perception is that this sentiment and opinion lead to real world events. They are related to the concept that the ‘animal spirits’ of humans drive financial markets.
Let us take an example: human beings often behave essentially like herd animals. This can be likened to the so-called ‘network effect’, where you moderate your actions and responses according to those of your neighbour or someone whom you respect, admire and listen to (i.e. act as they act and, to a certain extent, do as they do). This, then, has an influence on actions that lead to real outcomes. In other words, the actions of people can be linked to human instinct and so have an impact. If we believe that something is going to happen, it makes it more likely to happen. It's the classic self-fulfilling prophecy, or ‘placebo’ effect. There is even evidence that the latter has ‘real’ effects.
However, it is important to remember that surveys don't measure activity directly; theirs is an indirect role. They may, of course, have a link to an activity, but they are not as representative as the activity itself. That means they are not as powerful in measuring actions and outcomes as actual activity indices. Instead, what they are most useful for is alerting us to how activities are likely to change.
A study carried out by the Bank of England demonstrated this.3 It stated that, although surveys are very important, they are actually not important in or of themselves. Surveys don't move markets – it is what they may say about a forthcoming economic indicator that does that. They can tell us about sentiment surrounding forthcoming indicators, but, in themselves, they don't embody the impact. Ultimately, therefore, it is the indicators they are trying to predict that have the real effect.
Having said that, surveys still have a valuable role in understanding and interpreting economic data. By capturing perceptions, they have an intrinsic value and they achieve this across a variety of agents that operate in an economy: consumers, households and businesses. They can also be complementary, giving a sense of the direction of travel of data or of their turning points.
SURVEYS AND BEHAVIOURAL ECONOMICS
Where surveys are particularly important is in the role they play in the growing area of behavioural economics. Here, for example, the limitations of traditional ‘logical’ or ‘rational’ economics are tested and the so-called ‘bounded rationality’ concept of human behaviour emerges.
This school of thought shows that there are anomalies in the traditional account of human need for goods and services to satisfy their demand. These anomalies take the form of:
- Adhering to social norms
- The importance of maintaining self-image
- The availability or desirability of goods
- Altruism
- Making us happy.
What this means is that, according to neo-classical general economic theory, if the price of a particular good increases, demand for that good falls. Where the anomalies come into play, of course, is when, despite the price of a particular good increasing, humans will still purchase it, because it is important to their self-image, because there is pressure from someone else within their social group (i.e. the children demand it) or simply because it makes them ‘happy’ or feel good. There will at some point be a time when the price rise may become wholly prohibitive, but until that time is reached, demand for that good will be maintained.
These may appear, at first glance, rather trivial observations, but these are the motivations that drive human behaviour and that are the essence of economic activity.
