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.

After reading this book, I am convinced of the mind-body connection and the many ways we may "think with our bodies." Unlike what the title and cover suggests, the book is not totally about the "biology of the stock market", but uses the stock market as a central storytelling device (while giving a novelists' insider view of the trading floor), to advance the author's theories about how intertwined our various nonconscious organs are with our supposedly rational thoughts. It's quite an eye opener for those who like a bit more substance. Very much recommended.

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.