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The Hour Between Dog and Wolf

The Hour Between Dog and Wolf

Risk Taking, Gut Feelings and the Biology of Boom and Bust
by John Coates 2012 352 pages
3.93
1k+ ratings
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Key Takeaways

1. The biology of risk-taking: How hormones influence financial decisions

Testosterone, we could say, is the history molecule.

Hormonal influences. Testosterone and cortisol play crucial roles in shaping risk-taking behavior in financial markets. During bull markets, traders experience a rise in testosterone levels, which increases their confidence and appetite for risk. This can lead to a "winner effect," where success breeds more success, potentially morphing into overconfidence and irrational exuberance.

Feedback loops. As profits increase, testosterone levels rise further, creating a positive feedback loop that can amplify market trends. Conversely, in bear markets, cortisol levels spike, promoting anxiety and risk aversion. These hormonal changes can shift risk preferences systematically across the business cycle, contributing to market instability.

Implications for finance. Understanding these biological influences challenges traditional economic theories that assume purely rational decision-making. It suggests that market participants' physiology can significantly impact financial outcomes, highlighting the need for a more nuanced approach to risk management and market analysis.

2. The mind-body connection: Thinking with your entire being

We do not regard information as a computer would, dispassionately; we react to it physically.

Embodied cognition. The brain and body are intimately connected, with our physical state influencing our thoughts and decision-making processes. This challenges the traditional view of the mind as a disembodied, purely rational entity.

Physiological responses. When faced with financial risks or market volatility, traders experience a range of physical reactions, including changes in heart rate, blood pressure, and hormone levels. These bodily responses feed back into the brain, affecting judgment and risk perception.

Evolutionary perspective. Our cognitive processes evolved to support physical movement and survival in a dangerous world. This legacy continues to shape how we process information and make decisions, even in modern contexts like financial markets.

3. Speed of thought: Pre-conscious processing in high-stakes situations

We are for the most part on autopilot.

Rapid reactions. In high-pressure situations, such as trading volatile markets, decisions often occur faster than conscious thought can process. This relies on pre-conscious processing and automatic behaviors honed through experience.

Unconscious competence. Skilled traders, like elite athletes, develop the ability to make split-second decisions without conscious deliberation. This "unconscious competence" allows them to react effectively to rapidly changing market conditions.

  • Pre-attentive processing
  • Automatic motor responses
  • Gut feelings

Implications for training. Developing effective trading skills involves more than acquiring knowledge; it requires building neural pathways that support rapid, unconscious decision-making. This suggests the importance of experiential learning and simulations in trader education.

4. Gut feelings: The crucial role of intuition in decision-making

Gut feelings are not only real; they are essential to rational choice.

Somatic markers. Intuitions or "gut feelings" are not mystical phenomena but arise from complex physiological processes. The body stores emotional memories associated with past experiences, which can be rapidly accessed to guide decision-making.

Integrating emotion and reason. Contrary to the idea that emotions interfere with rational thought, research suggests that emotional input is crucial for effective decision-making, especially in complex or uncertain situations like financial markets.

Developing intuition. Traders can improve their intuitive abilities by:

  • Gaining extensive experience in their field
  • Paying attention to subtle bodily signals
  • Reflecting on past decisions and their outcomes
  • Engaging in deliberate practice to refine pattern recognition skills

5. Market bubbles and crashes: Biological feedback loops in action

Testosterone may be the molecule of irrational exuberance.

Hormonal amplification. Market bubbles and crashes are not solely driven by external economic factors but are amplified by biological feedback loops among traders and investors. During bull markets, rising testosterone levels can fuel overconfidence and excessive risk-taking, while bear markets see cortisol spikes that exacerbate pessimism and risk aversion.

Collective behavior. These individual hormonal changes can synchronize across large groups of market participants, leading to herd behavior and extreme market movements. This biological perspective offers new insights into the origins and dynamics of financial crises.

Policy implications. Understanding the biological underpinnings of market instability suggests new approaches to regulation and risk management. Potential strategies include:

  • Monitoring physiological indicators of market sentiment
  • Implementing "circuit breakers" to disrupt hormonal feedback loops
  • Promoting diversity in trading floors to balance out hormonal influences

6. Stress response on Wall Street: The physiology of financial crises

Perhaps the real challenge facing us is not so much how to incorporate women more fully into society but how to stop men from seceding from it.

Chronic stress effects. Prolonged exposure to high-stress environments, such as during financial crises, can lead to harmful physiological changes. Chronically elevated cortisol levels can impair decision-making, increase risk aversion, and contribute to health problems among traders and financial professionals.

Learned helplessness. Extended periods of market volatility and losses can induce a state of learned helplessness in traders, where they become overly pessimistic and unable to respond effectively to new opportunities. This psychological state has physiological correlates and can exacerbate market downturns.

Organizational implications. Financial institutions need to consider the physiological impacts of stress on their employees and implement strategies to mitigate its effects. This could include:

  • Regular health monitoring
  • Stress management programs
  • Redesigning work environments to reduce chronic stressors
  • Adjusting performance metrics to discourage excessive risk-taking

7. Building resilience: Toughening strategies for risk-takers

Stress is a perfect illustration of this point. We tend to think that stress consists primarily of troubling thoughts, of being upset because something bad has happened or is going to happen to us, that it is a purely psychological state. But in fact the unpleasant and dangerous aspects of the stress response – the nervous stomach, the high blood pressure, the elevated glucose levels, the anxiety – should be understood as the gastro-intestinal, cardiovascular, metabolic and attentional preparation for impending physical effort.

Physiological toughening. Just as athletes train their bodies to withstand physical stress, traders can develop physiological resilience to better handle the stresses of financial markets. This involves exposure to controlled stressors followed by recovery periods, which can expand the capacity of stress response systems.

Balanced hormone profiles. A resilient trader typically displays:

  • Rapid and strong initial responses to challenges
  • Quick return to baseline after stressors subside
  • High ratio of anabolic to catabolic hormones

Practical strategies. Techniques for building resilience include:

  • Regular physical exercise
  • Controlled exposure to cold (e.g., cold showers)
  • Mindfulness and meditation practices
  • Alternating periods of intense focus with deliberate recovery
  • Developing strong social support networks

8. Diversity in finance: The case for more women and older traders

If women could have such a tonic influence on the markets, why are there so few women traders?

Biological diversity. Introducing more women and older men into trading roles could help stabilize financial markets. Women typically have lower testosterone levels and different stress responses compared to young men, potentially reducing the likelihood of extreme risk-taking behavior.

Complementary skills. Research suggests that women may excel at long-term, strategic thinking in investment decisions. Older traders bring valuable experience and may be less susceptible to the testosterone-fueled feedback loops that can drive market bubbles.

Institutional changes. To promote diversity in finance:

  • Extend performance evaluation periods to reward long-term thinking
  • Create more flexible work environments
  • Address unconscious biases in hiring and promotion
  • Implement mentorship programs to support underrepresented groups in finance

9. From molecule to market: A new perspective on economics

Economics in particular could benefit from this approach, for economics needs to put the body back into the economy.

Integrating biology and economics. A deeper understanding of the biological basis of financial decision-making calls for a reimagining of economic theory and practice. This approach, sometimes called "neuroeconomics," seeks to bridge the gap between traditional economic models and the complex realities of human behavior.

Policy implications. Recognizing the role of biology in financial markets suggests new approaches to regulation and economic policy, such as:

  • Designing market structures that account for human physiological limitations
  • Implementing "cool-down" periods during high-volatility trading sessions
  • Encouraging practices that promote physiological resilience among market participants

Interdisciplinary future. The integration of biology, neuroscience, and economics promises a more holistic understanding of financial systems. This could lead to more effective risk management strategies, improved financial education, and ultimately, more stable and efficient markets.

Last updated:

Review Summary

3.93 out of 5
Average of 1k+ ratings from Goodreads and Amazon.

The Hour Between Dog and Wolf explores the physiological and neurological aspects of risk-taking in financial markets. Coates argues that hormones like testosterone and cortisol significantly influence traders' decisions, leading to irrational exuberance or pessimism. While some readers found the book insightful and well-researched, others criticized its deterministic approach and lack of practical solutions. The book's integration of finance, psychology, and neuroscience was generally appreciated, though some found it overly complex or repetitive. Overall, it offers a unique perspective on the biology behind boom-and-bust cycles in financial markets.

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About the Author

John Coates is a former Wall Street trader turned neuroscientist, uniquely positioned to explore the intersection of finance and biology. His background in both fields allows him to provide a distinctive perspective on risk-taking behavior in financial markets. Coates spent 12 years on Wall Street before transitioning to academia, where he now conducts research on the physiological aspects of decision-making in high-stress environments. His work focuses on how hormones and the body's stress response system influence financial risk-taking and market volatility. Coates' interdisciplinary approach combines insights from neuroscience, psychology, and economics to shed light on the biological underpinnings of financial behavior.

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