THE HOUR BETWEEN DOG AND WOLF

An in-depth look at how financial risk-taking is linked to human biology, especially to the testosterone levels of young male traders, and the implications of this phenomenon for financial markets and the wider economy.

Coates, who has a doctorate in neuroscience from the University of Cambridge and spent years as a trader at Goldman Sachs, Merrill Lynch, and Deutsche Bank, brings an educated, experienced eye to this examination of the biological side of the financial markets. In his view, the waves of irrational exuberance and pessimism that exaggerate bull and bear markets may be driven by physiological changes. The author has monitored the endocrine and autonomic nervous systems of traders in London to learn how physiological systems affect moods and behavior in competitive and risk-taking situations. When young male traders make money, their testosterone levels rise, and this chemical hit turbocharges their confidence and their level of risk-taking. Coates warns that overconfidence and overreaching lead to a bubble followed by a crash, and the stress response to a crash is a rise in another hormone, cortisol, leading to anxiety, fear and pessimism. The author also takes readers inside the brain, citing scientific research that explains how the brain and body work together, how gut feelings affect thinking, and how we might become physiologically more resilient to stress. Finally, the author suggests steps that banks and fund managers might take to manage the biology of risk takers—and thus keep them from turning from dog to aggressive, dangerous wolf. Among these are changing the year-end bonus system and reining in hot traders with mandatory cooling-off periods. Not surprisingly, another is to broaden trader demographics—i.e., hire more women and more older men. Generally, Coates uses concrete examples to make understandable both the financial and neurological complexities that are central to his argument.

Well-presented and intriguing.