The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust [Hardcover]

Coates has the rare privilege of being both a researching neuroscientist as well as a former financial trader. He thus has personal and professional insight into the topic at hand: how the human body responds to risk and what this means for financial trading. Coates applies a blend of neuroscience, evolutionary psychology, and sports psychology to explain the link between body and brain amongst traders (and more broadly, people in general). The book is very interesting to read, but it tends to over-reach its evidence.

Coates' main thesis is that the body plays a significant role in our decisions. Not the brain, the body. Coates continues the trend of exploring our decision making from a non-conscious point of view (a theme in books like Blink or Fast and Slow). Only Coates moves beyond the unconscious brain to discuss how the body impacts our thinking. Largely, Coates examines how hormones related to fight or flight systems in the body change the way we behave and think. Far from the rational model of behavior dominant for so long in economics (honestly, I can't believe anyone still believes that nonsense), Coates shows how winning can prime a testosterone boost that amplifies not only traders' successes, but also their appetite for risk and hubris. Thus one gets a spiral of effective optimism that leads to hubris that leads to a spectacular crash and burn. At which point cortisol takes over and induces the opposite effect. Exaggerated withdrawal and reduced efficacy, leading to missed opportunities. Coates examines the evidence using both lab and field data, the latter collected from real London financial traders at work.

Coates is an engaging author, and uses fictional characters to illustrate each of the systems he discusses. There's lots of really interesting information in hear that applies to risk taking in general, not just finance (hence the importance of sports psychology). I for one had either never heard of, or forgot about, the enteric nervous system- a nervous system regulating our gut that is separate from our central nervous system. Coates discussion of its interplay with the vagus nerve and thus the CNS is quite interesting. However, Coates does have the habit of stretching his data to conclusions that are not directly supported by his evidence. In other words, this book contains a lot of speculation, particularly with regards to how we can use this knowledge to regulate the unnecessary risks taken by financial traders. There are some good ideas such as hiring more women and older men whose hormone and stress responses are different than those of the young men who dominant trading. There are also some stranger ideas such as monitoring individual hormone levels, or expecting banks to change the way they hire and do business (strange in that banks are unlikely to do so). I also think that Coates puts too much emphasis on the role of these responses in creating financial crisis compared to things like consumer behavior, government regulations, and the ratings of security agencies. I don't think he's often wrong, just a little too over-enthusiastic with his application of his theory to some problems.

Overall then, this is a very good book. Because he frequently pushed the evidence a little too far, I could not give it five stars (four or four and a half seems right). But if you can keep that caveat in mind, this is an excellent and fun to read book about risk, finances, and our bodies. Highly recommended for anyone interested in the brain, body, and/or finance.

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.

"A fool vents all his feelings,
But a wise man holds them back." -- Proverbs 29:11 (NKJV)

The financial markets are supposed to be efficient (almost perfectly reflecting the known information to set accurate valuations). Yet most stocks will oscillate plus or minus 30 percent from their daily closing average during the course of a year. Surely, the value of the company didn't shift so much in that time?

In recent years, experiments by behavioral researchers have challenged the efficient markets theory by showing that many decisions work differently than a calculating computer would. In The Hour between Dog and Wolf, John Coates (a senior research fellow in neuroscience and finance) reports on newer research into how the bodies of people making investment and trading decisions are affected by what they are doing. Drawing on his personal experience at Goldman Sachs and Deutsche Bank, the findings are described in the context of market conditions that will seem quite familiar to experienced investors. I found the book to be fascinating. And I included a recommendation to read it in Lesson Fourteen of my next book, Excellent Solutions.

I thought that the book was weakest in postulating possible ways to dampen the harmful effects of neurology and body chemistry on investment behavior. I will welcome controlled experiments that follow up on these measurements to see how minds and bodies can be kept under more appropriate discipline in making decisions and taking actions.