Book Review: The hour between dog and wolf

Coates, John. The hour between dog and wolf : risk-taking, gut feelings and the biology of boom and bust. Penguin Press, 2012.

In recent years, there have been a number of books published that explain how market participants make decisions and why risk takers make errors.  The name of this discipline is behavioral finance.  Among the best works is a new book, The Hour Between Dog and Wolf, written by a former trader at Goldman Sachs and Deutsche Bank, who quit his job, earned a doctorate in neuroscience from Cambridge University and began to research the biology of financial risk taking.

John Coates begins his book by explaining that high-stakes risk taking triggers strong emotions and biological reactions in financial traders.   On a day when traders make millions, they become arrogant and egotistical.  When they lose millions, they become paralyzed, mentally replaying their mistakes.  While there is no real physical risk in financial trading, their bodies experience the same physical changes that enabled our ancestors to fight an enemy or flee from a predator.  Coates describes these physical changes and why they happen, including the effect of hormones, particularly steroids such as testosterone and cortisol that have profound effect on thinking and behavior.  Coates explains that when traders make money, they experience a surge in testosterone that results in overconfidence, impulsiveness and excess risk taking.  When traders lose money, they experience a surge in the steroid cortisol that promotes feelings of anxiety and fear.  Coates hypothesizes that during bull markets, testosterone rises among participants, which leads to bubbles.  During bear markets, cortisol rises,  encouraging sell offs, and eventually creating crashes.  He believes that the financial community develops chronically elevated steroid levels that profoundly effect market behavior.

Using anecdotes and examples from his own personal experience as a trader, Coates shows that rational decision making on Wall Street is overshadowed by primitive drives.  Coates relates how the brain and body work together and discusses the role of gut thinking.  Near the end of the book, he offers solutions to the emotional boom and bust, including changes to the incentive structure, mandatory vacations for traders and workforce diversification, as women and older men have less testosterone.  This thought provoking book is entertaining to the end.

Also available as an audiobook.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

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