The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind

What an amazing read. The first time I have seen someone connect biology and trading, and make such amazing and convincing arguments and observations in the process. I think this is a must have in any traders bookshelf. When you want to take a break from charts and financial analysis, pick this one up and you will learn important information. The book is all about explaining what is happening in our body when we trade. A behind the scenes look that shows how our nervous system combined with hormones interact with our body and what happens when we trade. What happens when we take on risk, when we manage the positions, take on more risk, etc. What happens when we succeed wildly and also when we crash badly. The book ends with some high level policy advice that I agree: markets would benefit from increasing the number of women and older men participating in them. It also has much advice at an individual level, how to condition yourself to become better at handling stress. All in all, loved this book!

Dusk, in medieval times, was the hour between dog and wolf, a time when we could not easily distinguish one from the other. There was a pervasive fear that the dog you knew could become a wolf. Author John Coates worked on Wall Street, in the 1990s, trading derivatives for Goldman Sachs, then Merrill Lynch, and finally running a desk for Deutsche Bank. During this time, the Nasdaq rose from 600 to a peak of just over 5,000! This spectacular rise was unsupported by any hard financial data. Translates into non-trading terms that means that the growth was based on a widely accepted delusion. The economist, John Maynard Keynes, noted in the 1930s that markets could remain irrational longer than investors could remain solvent. In 2000, the Nasdaq collapsed dropping more than 3,000 points in about a year. “While they last, (market) bubbles are fun,” notes Coates. During this period, he observed trader’s turn from dog to wolf. Investors egged on by traders were putting money into companies with inexplicable business models, in internet industries they did not understand. Coates noted at the time that it was almost impossible to engage in a reasoned discussion with either the owner or the investors. According to folk wisdom, behind this type of mayhem lies overwhelming greed. It leaves no place for the sober thought that what cannot last, will not last. Coates observed traders moving from assessing risk and making professional judgement accordingly, to believing that they knew what was going to happen. He observed “they even walk differently: more erect, more purposeful, their very bearing carrying a hint of danger: ‘Don’t mess with me,’ their bodies seem to say. ‘I can handle anything.’” Their behaviour caught Coates’ during the dot.com era. It was undeniable that people were changing. Traders were slowly becoming euphoric and delusional. They were placing ever larger bets on ever worsening risk-reward trade-offs. This type of behaviour has been identified in other areas, particularly politics. Lord David Owen, the former British Foreign Secretary, a neurologist by training, called the disorder, the Hubris Syndrome. It is characterised by “recklessness, an inattention to detail, overwhelming self-confidence, and contempt for others.” What struck Coates at the time was the relative immunity of women to this frenzy. Some had suggested that the mood was driven by the use of cocaine, but the extent of drug use was wildly exaggerated. Coates became convinced that we should be looking at traders’ biology. He hypothesised that the extreme overconfidence and risk-taking displayed during bubbles may be a chemically induced pathological behaviour. This could explain the difference between male and female responses. Coates retired from Wall Street and returned to the University of Cambridge, where he had earned his Ph.D in economics, and spent the next four years retraining in neuroscience and endocrinology. He designed experiments to test the hypothesis that the “winner effect” exists in the financial markets. The “winner effect” has been identified in animals who have won fights, and now with even higher testosterone, go on to more risky fights. A similar phenomenon can be observed in sportsmen. Through observation and experiments, Coates and others have been able to identify how our physiology actually determines, not simply affects, behaviour. This is a powerful and counterintuitive insight. In the west, we have been raised on the notion that our brains control our bodies, but reliable science is fast showing the reality is just the opposite. Kehaneman and Twersky studied the effects of behaviour on economics throughout the 20th century and won a Nobel Prize for their work. They showed, put simply, how economics is not a function of rational man making rational decisions, but rather that our minds affect our economic decisions in ways we are unaware. Coates highlights the step beyond this – our bodies actually control our thinking in ways we are unaware. Consider a cricket fielder at silly mid-on, a position extremely close to the batsman. The ball leaving the bat can travel at speeds of up to 160 kilometres an hour. Crouched four metres from the batsman does not give the fielder enough time to register the trajectory of the ball consciously. His react to this lethal projectile occurs in 90 milliseconds. The body does the thinking before the mind knows. The speed here is similar to the speed at which decisions have to be made in trading and investment. There is no time for a thorough analysis and research. Many well-known investors, including George Soros, admit being guided, in part, by physiological responses to positions. Soros reports that he used the onset of acute back pain as a signal that there was something wrong with his portfolio. The notion of “gut feeling” implies that in even the most complex mental tasks, such as understanding the stock market, our bodies are giving guidance. Knowing when to take the guidance and when to ignore it is not a simple matter. It is here that knowledge and experience come into play. Our bodies have evolved over centuries to respond to physical risks. Financial risk carries a similar threat, not of risk to life but certainly of risk to lifestyle and social status. Little wonder that the chemical or hormonal responses are similar. Much has already been learned about dealing with stress situation from Sports Science. There is evidence that just as physical toughness can be developed to peak levels as seen in world class athletes, so too can mental toughness. This toughness would allow people in high stress, fast-paced business environments, to function more effectively. That would be very useful. Readability: Light ----+ Serious Insights: High +---- Low Practical: High ---+- Low * Ian Mann of Gateways consults internationally on leadership and strategy.

Investors are well served by studying behaviorial and decision-making psychology broadly and then selectively transferring that knowledge to financial markets. Arguably, the most influential readings come from authors who are not directly involved in financial markets. For example, the Psychology of Intelligence Analysis by former CIA staffer Richard Heuer captures the pitfalls of making decisions when faced with incomplete information. Stepping back further, to readings about the emerging discipline of neuroeconomics, requires a basic understanding of brain science and physiology. There are some useful layman's guides to these subjects, such as Brain Rules by John Medina but what's been missing is a book that ties together a cohesive explanation of why your brain and physiology drive your behavior and how this collective impact can translate into a greater understanding of market behavior. The Hour Between Dog and Wolf succeeds in this objective. Using both plain language and vivid trading room stories, author John Coates has written an important book for finance industry professionals who want to expand their understanding of the biological underpinnings of behaviorial finance. The book's fictitious examples of trading floor scenarios are particularly effective. Science always becomes more interesting when its explained with personalized situations. Coates has succeeded in connecting the neuroscience with the behaviorial / cognitive psychology that's most relevant to investors. Finally, the 'suggested reading' section is excellent, a primer for further study that's accessible to non-scientists.

If you have ever wondered why very intelligent people seem to take inordinate risks, often against the prevailing evidence, then this book is a must read. Much of this risk taking has resulted in the current economic melt down since 2008. Not only does John Coates deal with the practicalities of risk taking on the Wall Street dealing floor but also deals in detail with the biology that drives and is instrumental in risk in human and animal behaviour. I have just written and placed on Kindle and Amazon, my own fictional crime and mystery book (Death At The Titanic), which also deals with risk as well as other themes. The Hour between the Dog and the Wolf is an excellent exposition of the subject and it is dealt with in an informative and often amusing manner. It changed my mind about the concept of `gut feelings.' An informative, well written and good read on a complex topic.

The Hour between the Dog and the Wolf is about risk taking, the nervous system and our biochemistry and how they all relate to each other in various feedback mechanisms. The book is both a combination of a scientific introduction to the way the nervous system and body work together and a fictional narrative of the trading floor in a bank. The narrative is used to describe the real time emotional changes felt by traders in response to their changing risk and profit environments. The book is informative and readable and I came out of it better understanding myself. The book is split into 4 distinct parts. The first section is titled Mind and Body in the Financial Markets. The backdrop is the internet bubble and questions of exuberance in markets is pondered. The author introduces testosterone and cortisol as potential active molecules in impacting decision. Basic concepts of mind body separation are included. The author then goes on to describe the mind as facilitating the body. He discusses how if one view our purpose in life as to move, then the mind is just an elaborate mechanism to facilitate that movement more productively. This helps give the platform to understand us as being always being a vehicle for movement and that we should not deny the signals our body sends us. The second section - Gut Thinking discusses the way our instincts can propogate through the nervous system. He discusses how our body's instincts operate on a much faster speed than our computational thought. This subject matter is similar to that of many behavioural scientists and is akin to Kahneman in fast and slow thinking. The value of relying on instincts is studied and our instincts are shown to be very good at pattern recognition which can fail when we are faced with randomness. The inclusion of our muscle responses to our nervous system and our internal feedbacks helps give an overall view of our various mind body relationships. The 3rd section Seasons of the Market discusses various market regimes and how our body chemistry in each of those regimes is different. Searching for opportunity, riding waves of profit or enduring catastrophic losses are all discussed via narratives of characters the author uses. It helps make sense of real life situations and how we are all biased agents when it comes down to it. This section is where the author really weaves in the impact on financial decision making. The author concludes with discussing the difference between various types of people and how environment and activity can affect our instincts and our feedback mechanisms. We all have some plasticity and though we inevitably are impacted by the stresses around us we can handle them differently and experience matters. The author then goes on to give partial solutions to dampening the positive and negative feedback loops our body creates in risk taking behaviour to improve our financial system. All in all The Hour Between the Dog and the Wolf is a very informative account of the way we work in stressful environments and how those environments affect the way we think and act in an active fashion. I much preferred the scientific explanation instead of the specific impact on trading as the lessons are very broad and are relevant to much more than trading. One does not come out of reading the book having a clear path to more robust financial management as that is extremely challenging but one does come through it with more insight about how we work.

The cover was damaged when we received them

I found this book both informative and entertaining. I'm a full time futures trader myself and have been genuinely curious, like the author, about the effects of stress on decision making under uncertainty. I wondered if it could be considered chronic mild stress, or worse, chronic acute stress. The author provides a lot of information about the science behind a not well known profession (in terms of stress). Additionally, I found the book entertaining beyond the science with his personal stories in the market.

Using financial traders as his example of how there is no distinction between our mind and body Coates carefully and clearly explains the biology of decision making and risk taking. And he masterfully argues that understanding the biology of risk taking has clear implications for how risk taking should be managed. For example he argues that Wall Street bonuses should be paid over at the turns of the business cycle instead of annually. Most importantly this book should sound the death knell of neoclassical economics. What Kahneman calls slow thinking is not the basis of a large amount of economically relevant decisions. And his fast thinking is inherently biological thinking not abstract rational thinking. (Coates also effectively demonstrates that Kahneman's claim that fast thinking is error prone is wrong. Coates argument has given me a new appreciation of MLB batters.) Economists and businessmen will provide better explanations and create better incentives by systematically accounting for the biology of decision-making that is clearly and convincingly described by Coates.

Greatly written book about the biology of trading with lots of background information. I enjoyed reading this because I went through the trader's blues from bust to boom a couple of times myself and books like this help to understand what's happening to me when I run into problems.

Great book. The author is a neuroscientist who was a trader, I am interested in both these things and the book combines them to give readers insight into both worlds. Enjoyed the fact it brought to life concepts that may be more dryly presented elsewhere.

For all the books I have ever read about behavioral economics, psychology and trading, hoping to become a better trader ( I spent about 4 years as a pro prop trader) none of them combined comes close to this in giving me what I was looking for. And I'm not exaggerating. While most traders, or would be traders, go into the profession thinking they can beat the market if they learn more, or learn to control their emotions and discipline, Coates gets to the heart of the matter, which is...decision making behavior is principally a product of things we do not control, and more specifically, it is due to hormones. It's not that simple, or simplistic of course but Coates writes in an entertaining way that is both academically valid, completely compelling and thoroughly entertaining! Understanding how and why we act is something rarely addressed by most writers in trading psychology. Yet it is without question, the most crucial step to improvement. I can't give the book enough praise.

El libro describe los principales tipos de hormonas que afectan a nuestro cuerpo y a nuestro comportamiento, con un enfoque centrado en actividades competitivas como deportes y trading. También explica cómo dichas hormonas afectan positiva o negativamente a nuestra salud a largo plazo y cómo el estado de nuestro cuerpo también influye en nuestro comportamiento, modificando nuestras decisiones conscientes sin que nos demos cuenta.

The author has done a good job explaining why we do some irracional things when trading. But I was expecting a little more about how we can avoid this kind of behavior