"The Hour Between Dog and Wolf" by John Coates is a fascinating exploration of how our biology influences our behavior, particularly in high-stakes environments like the stock market. Coates, a former Wall Street trader turned neuroscientist, combines his unique experiences to shed light on the intricate relationship between our bodies and our decision-making processes.
The book's title refers to a French expression describing the twilight hour when it's difficult to distinguish between a dog and a wolf - a metaphor for the fine line between rational behavior and reckless risk-taking. Coates argues that this transformation is not just psychological but deeply physiological, driven by hormones and bodily processes that can profoundly impact our choices and actions.
Through a blend of scientific research, personal anecdotes, and observations from the trading floor, Coates presents a compelling case for understanding human behavior through the lens of our biology. He challenges traditional economic theories that assume rational decision-making and instead proposes a more holistic view that incorporates our physical responses to stress, competition, and risk.
The Whole-Body Thinker
One of the central ideas in Coates' book is that thinking is not confined to the brain alone - it's a whole-body process. This concept challenges the common perception of the brain as a separate control center directing the body's actions.
The Body-Brain Connection
Coates explains how various parts of our body influence our thoughts and actions through hormones and other biochemical processes. For example, he discusses the hormone ghrelin, which is produced in the stomach when it's empty. Ghrelin sends signals to the brain, making us feel hungry and prompting us to eat. While we can override these signals to some extent (for instance, during a fast or diet), over time, they become increasingly difficult to ignore.
This example illustrates how different body regions can influence brain processes. It's not just a one-way street of the brain controlling the body; instead, there's a constant dialogue between various body systems and the brain.
The Gut-Brain Axis
Coates delves into the fascinating relationship between our gut and our brain. When we're stressed, the brain informs the gut of the potential threat, causing the digestive process to slow down or halt entirely. This physiological response prepares the body for fight or flight by conserving energy for immediate action.
Interestingly, this connection works both ways. Coates points out that people with certain gut conditions, like Crohn's disease, tend to be more sensitive to emotional stimuli. This heightened sensitivity demonstrates how our gut health can influence our emotional responses and overall mental state.
Embodied Cognition
The idea of "thinking with your whole body" aligns with the concept of embodied cognition in cognitive science. This theory suggests that our cognitive processes are shaped by our physical experiences and bodily states. Coates' work provides compelling evidence for this perspective, showing how our physiological responses can guide our decision-making, often without our conscious awareness.
The Testosterone Effect
A significant portion of the book focuses on the powerful influence of testosterone on human behavior, particularly in competitive environments like the stock market.
The Power of Testosterone
Coates explains that testosterone is released in our bodies when we face challenges or enter competitive situations. This hormone has several effects:
- It accelerates our metabolism
- Increases the rate of cell growth
- Enhances physical strength
- Improves mood
- Boosts cognitive performance
These effects can be beneficial in many situations, allowing us to perform at our best when faced with challenges.
Risk-Taking Behavior
However, Coates points out a crucial downside: high testosterone levels also increase our propensity for risk-taking. In his research on stock market traders, he found that while testosterone didn't improve trading skills (which come from experience), it did lead to increased risk-taking behavior.
The Winner Effect
Coates introduces the concept of the "Winner Effect," a feedback loop where success leads to increased testosterone levels, which in turn leads to more risk-taking behavior. This effect has been observed in animals, where victorious males experience a testosterone spike, making them more likely to win future fights. The losers, conversely, experience a drop in testosterone, making them more likely to avoid future confrontations.
In humans, particularly in competitive environments like trading floors, this effect can lead to overconfidence and increasingly reckless behavior. Coates argues that this physiological process plays a significant role in the formation of market bubbles.
The Hour Between Dog and Wolf
The book's title refers to this transformation caused by high testosterone levels. It's the moment when a person shifts from being cautious and rational (the "dog") to becoming overly confident and prone to excessive risk-taking (the "wolf"). Coates suggests that understanding this biological process is crucial for managing risk in financial markets and other high-stakes environments.
The Anticipating Brain
Coates delves into the fascinating world of how our brains process information and make decisions, often faster than we can consciously perceive.
The Delay in Perception
He explains that due to the structure of the human eye, we experience a slight delay (about one-tenth of a second) between an event occurring and our brain registering it. This delay might seem insignificant, but in fast-paced situations - like catching a ball or making split-second decisions in the stock market - it could be crucial.
Brain's Predictive Mechanisms
To compensate for this delay, our brain has developed predictive mechanisms. It anticipates the position of moving objects rather than seeing them in real-time. Coates describes an experiment where participants observe a moving circle with two color bands. The brain can anticipate the movement of the outer band but struggles with the flashing inner band, resulting in a perceived lag.
This predictive ability is what allows us to catch fast-moving objects or make quick decisions based on rapidly changing information. It's a key survival mechanism that has evolved over time.
Unconscious Decision-Making
Coates goes further to discuss how many of our actions and decisions occur before we're consciously aware of them. He cites Benjamin Libet's famous experiment, which showed that the brain region responsible for preparing an action (like lifting a finger) becomes active before the region associated with conscious decision-making.
This finding suggests that our consciousness often acts as an observer rather than the initiator of our actions. It's a challenging concept that raises questions about free will and the nature of decision-making.
Intuition and Pattern Recognition
A significant portion of the book is dedicated to exploring the nature of intuition, particularly in the context of stock market trading.
The Nature of Intuition
Coates challenges the notion of intuition as a mysterious or supernatural gift. Instead, he presents it as the result of our body recognizing patterns in the environment, often before we're consciously aware of them.
Predicting the Market
Contrary to the Efficient Market Hypothesis, which states that markets are inherently unpredictable, Coates argues that experienced traders can indeed learn to predict market movements to some extent. He supports this claim with data showing that experienced traders consistently outperform the market and less experienced traders.
Somatic Markers
Coates introduces the concept of "Somatic Markers" - unconscious physical reactions that influence our decision-making. These are bodily sensations or "gut feelings" that arise in response to certain situations, based on our past experiences and learned patterns.
For traders, these Somatic Markers might manifest as subtle physical responses to market conditions, guiding their decisions even before they can articulate why they're making a particular trade. This explains why experienced traders often can't fully explain their successful strategies - they're relying on intuition built up over years of experience, manifested through these physical cues.
The Importance of Body Awareness
Given the role of these physical responses in decision-making, Coates emphasizes the importance of body awareness. He suggests that individuals who are more in tune with their bodily sensations might have an advantage in interpreting these subtle cues, potentially leading to better intuitive decision-making.
The Physical Demands of Trading
Coates paints a picture of stock market trading that might surprise many - far from being a sedentary job, successful trading requires a high level of physical fitness and cognitive stamina.
The Athletic Trader
He notes that many successful traders are former athletes, possessing qualities like high stamina, excellent concentration skills, and quick reflexes. These attributes are crucial for the demands of the trading floor.
Visual Scanning and Concentration
Traders spend hours engaged in intense visual scanning, looking for minute price anomalies across multiple screens. This task is incredibly taxing on the brain and requires sustained concentration over long periods.
The Need for Speed
In the fast-paced world of trading, speed is crucial. Traders must be able to spot opportunities and act on them quickly before others do. Even a slight delay can mean the difference between a profitable trade and a missed opportunity.
Physical Fitness and Trading Performance
Coates argues that physical fitness is not just beneficial but often necessary for successful trading. Fitness contributes to:
- Better concentration and mental stamina
- Quicker reaction times
- Improved ability to handle stress
- Enhanced body awareness, which can lead to better interpretation of Somatic Markers
He cites research showing that individuals with better physical fitness tend to be more aware of their bodily signals, which can translate to more reliable "hunches" on the trading floor.
The Addiction of Success
Coates explores how the thrill of successful trading can lead to addictive behavior and excessive risk-taking, particularly during bull markets.
The Dopamine Rush
Successful trading, like gambling, can trigger the release of dopamine in the brain. Dopamine is associated with feelings of pleasure and desire, and its release can create a powerful drive to repeat the behavior that caused it.
Coates describes an experiment with rats where the anticipation of a reward (a drop of juice) caused their dopamine levels to rise even before receiving the reward. This anticipatory rise in dopamine is similar to what traders experience when they expect a successful trade.
The Interaction of Dopamine and Testosterone
During bull markets or market bubbles, the effects of dopamine are amplified by rising testosterone levels. Each successful trade not only provides a dopamine rush but also increases testosterone levels, leading to the Winner Effect we discussed earlier.
The Vicious Cycle
This creates a potentially dangerous feedback loop:
- Successful trades increase dopamine and testosterone levels
- Higher testosterone levels increase willingness to take risks
- More risk-taking leads to more trades (some successful, some not)
- Successful trades further increase dopamine and testosterone
This cycle can lead traders to take increasingly large and unwise risks, contributing to the formation of market bubbles.
The Parallels with Addiction
Coates draws parallels between this cycle and drug addiction. The craving for the next "high" (in this case, a successful trade) can override rational decision-making, leading to behavior that's ultimately self-destructive.
The Physiology of Market Crashes
Just as the physiology of traders contributes to the formation of market bubbles, it also plays a significant role in market crashes and how traders respond to them.
The Stress Response
During a market crash, traders experience an intense stress response. The primary hormone involved is cortisol, which has significant effects on brain function:
- Short-term benefits: Cortisol can provide a burst of energy to deal with immediate threats.
- Long-term problems: Prolonged exposure to high cortisol levels can be harmful.
Effects on Memory and Decision-Making
Coates explains how cortisol affects traders during a crash:
Memory bias: Under the influence of cortisol, traders tend to remember their losses more vividly than their wins. This can lead to decreased confidence and increased risk aversion.
Impaired rational thinking: Cortisol inhibits the frontal lobe, the brain region responsible for rational thought. This makes traders more susceptible to rumors and less able to think clearly about market conditions.
Difficulty focusing: The locus coeruleus, which helps us focus on relevant stimuli, becomes overactive. This makes it hard for traders to distinguish important market signals from noise.
Irrational Behavior
These physiological effects can lead to irrational behavior among traders:
- Missing good opportunities due to excessive caution
- Overreacting to market rumors
- Increasing market volatility through panic selling
Social Stress
Coates also points out that the stress of a market crash is often exacerbated by social factors. He draws parallels with primate behavior, noting that stressed dominant males often bully subordinates. In the trading environment, this can manifest as managers creating additional stress for their teams through threats of layoffs or other punitive measures.
This social stress further compounds the physiological stress response, making it even more difficult for traders to make sound decisions during a crisis.
Building Resilience in Traders
Given the significant impact of stress on trader performance, Coates explores ways to build resilience and manage stress more effectively.
The Genetics of Resilience
While some aspects of stress resilience are genetic, Coates argues that it's possible to "toughen up" through exposure to moderate stress. He cites studies showing that rats exposed to mild stress early in life (like being handled by humans) exhibit fewer stress responses as adults and even live longer.
However, he cautions that the stressor must be moderate - severe stress can have the opposite effect, making individuals more vulnerable to future stress.
The Benefits of Exercise
Physical exercise, especially in cold conditions, can help build resilience. Exercise releases growth factors that support neuron growth, strengthening the brain against stress and aging. Coates mentions studies showing that rats that swim regularly in cold water have better stress responses.
He draws parallels with human practices like the Nordic tradition of alternating between sauna and cold showers, suggesting that such practices might help build stress resilience.
Task Switching and Mental Fatigue
Coates emphasizes the importance of allowing traders (and workers in general) to switch between tasks freely. He argues that many work-related illnesses and mistakes occur because employees have no choice in what they focus on at any given time.
Allowing voluntary task switching throughout the day can help reduce fatigue and keep traders mentally fresh. This strategy can help maintain focus and reduce stress-related errors.
Diversifying the Trading Floor
One of Coates' most intriguing suggestions for improving market stability is to diversify the population of traders on the trading floor.
The Young Male Dominance
Coates points out that trading floors are typically dominated by young men. This demographic is particularly susceptible to the effects of testosterone, which can lead to the volatile behavior we've discussed earlier.
The Case for Older Traders
Coates suggests hiring more older men as traders. Testosterone levels in males peak in the mid-twenties and then gradually decline, stabilizing around age 50. Older traders are therefore less likely to exhibit the extreme risk-taking behavior associated with high testosterone levels.
He acknowledges that trading floors often discriminate against older traders due to their slower reaction times and more cautious attitudes. However, he argues that these traits can actually be beneficial, citing successful investors like Warren Buffett who achieved their greatest successes later in life.
The Benefits of Female Traders
Coates makes a strong case for increasing the number of female traders. Currently, women make up only about 5% of the trading floor population. He argues that women are less susceptible to testosterone-induced market frenzies for two main reasons:
Lower testosterone levels: Women naturally have only 10-20% of the testosterone levels found in men, making them less prone to testosterone-driven risk-taking.
Different stress response: While women can experience the "fight-or-flight" response, they more often exhibit a "tend-and-befriend" response to stress. This involves caring for others and seeking social support, which could have a stabilizing effect on the trading floor environment.
The Potential Impact
By diversifying the trading floor with more older men and women, Coates suggests we could create a more balanced and stable market environment. This diversity would help mitigate the extreme swings caused by testosterone-fueled risk-taking and potentially reduce the frequency and severity of market bubbles and crashes.
The Role of Novelty and Control in Stress Management
In the final sections of the book, Coates explores some counterintuitive ideas about managing stress, particularly the roles of novelty and control.
The Stress of Novelty
Contrary to popular belief, Coates argues that novelty - even positive novelty like an exotic vacation - can actually increase stress levels when we're already under pressure. He cites research showing that major life changes, both positive (like weddings or births) and negative (like divorces or deaths), can increase the risk of illness and mortality.
The explanation is that novel situations, regardless of whether they're perceived as positive or negative, add to our overall physiological stress load. This is why, counterintuitively, it might not be the best idea to take an exotic vacation when you're already stressed from work.
The Importance of Familiarity
Instead of seeking novelty during stressful times, Coates suggests that what we really need is familiarity. Familiar environments and routines can help reduce our stress levels by providing a sense of predictability and safety.
The Power of Control
When it's impossible to avoid novel or stressful situations, Coates emphasizes the importance of maintaining a sense of control. He discusses studies showing that patients in pain suffer less when they have some control over their pain medication, even if they don't actually use more medication.
The mere perception of control can significantly reduce stress levels and improve our ability to cope with challenging situations. This principle could be applied in various settings, including the trading floor, where giving traders more autonomy might help them manage stress more effectively.
Conclusion
"The Hour Between Dog and Wolf" presents a compelling argument for understanding human behavior, particularly in high-stakes environments like the stock market, through the lens of our biology. John Coates challenges traditional economic theories that assume purely rational decision-making, instead painting a picture of human choices deeply influenced by hormones, physical responses, and unconscious processes.
Key takeaways from the book include:
- Thinking is a whole-body process, not just confined to the brain.
- Hormones like testosterone play a significant role in risk-taking behavior and market dynamics.
- Our brains anticipate and react to situations before we're consciously aware of them.
- Intuition and "gut feelings" are often the result of unconscious pattern recognition by our bodies.
- Physical fitness and body awareness can improve decision-making in high-pressure environments.
- The physiological responses to success can lead to addictive behavior and excessive risk-taking.
- Market crashes trigger intense stress responses that can lead to irrational behavior.
- Building resilience through moderate stress exposure and exercise can improve stress management.
- Diversifying trading floors with more women and older men could lead to more stable markets.
- In times of stress, familiarity and a sense of control are more beneficial than novelty.
Coates' work has implications far beyond the trading floor. By understanding the biological underpinnings of our decision-making processes, we can potentially improve our choices in various high-stress situations, from business negotiations to emergency responses.
The book also raises important questions about how we structure our financial systems and work environments. If our physiology plays such a significant role in our decision-making, should we be designing our institutions and policies to account for these biological factors?
Ultimately, "The Hour Between Dog and Wolf" encourages us to view ourselves as integrated beings, where mind and body are inextricably linked. It challenges us to consider how our physical states influence our thoughts and actions, and how we might harness this knowledge to make better decisions and create more stable systems.
By bridging the gap between neuroscience, psychology, and economics, Coates provides a fresh perspective on human behavior in high-stakes environments. His insights offer valuable lessons for anyone interested in understanding the complexities of human decision-making, from individual investors to policymakers shaping financial regulations.
As we continue to navigate an increasingly complex and fast-paced world, the lessons from "The Hour Between Dog and Wolf" remind us of the importance of understanding and respecting our biological nature. By doing so, we may be better equipped to manage risk, make sound decisions, and create more resilient systems that can weather the storms of uncertainty and change.