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The change in trading volume and returns and the dysfunction of the economy and more specifically of financial markets has been increasingly attracting attention of researchers, analysts, practitioners, institutions as well as government organizations. This paper investigates the factors that are able to explain how financial markets work. Testing the rational expectation hypothesis and different components of animal spirits including investors’ beliefs and their behavioral biases, results show that economy is driven by animal spirits and not by rational behavior. Considering the classification of the sample by periods of stability and periods of excessive volatility, results incite to think that financial markets work in terms of economic cycles.