The Hour Between Dog and Wolf

John Coates is a former Goldman Sachs trader turned biological researcher. His unique background makes The Hour Between Dog and Wolf an interesting read. The title refers to the Jekyll-and-Hyde transformation that traders went through during times of extreme market conditions. My two big takeaways were the importance of moving your body for the impacts of your brain, and the impact that your physiology (cortisol, testosterone, adrenaline, serotonin, etc) can have on your decision-making process.

The Importance of Movement

One of the most interesting insights in the book is that our brains are designed for motion and that the mind and body are intertwined. Roughly 70% of your brain mass is dedicated to motion.

One example of this is our brain’s ability to synchronize sound and sight. Sound makes its way into the brain slightly faster, but your mind synchronizes the two inputs to help make the world more coherent. This is effort is complicated further because light travels faster than sound, so the synchronization needs to be dynamic, depending on the distance to the object.

Your mind also projects moving objects forward in time to reduce the amount of delay added for processing time. This is why major league hitters can hit a 100-mile-an-hour fastball. Additionally, some of the parts of your brain are designed to handle threats and other objects moving without your active mind participating. By removing the need for active decision-making, your brain can speed up response time and deliver a more consistent result.

One anecdote that really cemented the relationship between motion and your brain is the life of a sea slug called a tunicate. Creatures without brains often can’t really move (plants can grow slowly but can’t react to threats with the same speed as animals). Tunicates are born with a primitive brain that allows them to move and find nutrient-rich water. Once they find a spot with lots of food, they face-plant on the ocean floor and consume their own brain. The sea slug no longer needs to move, so it no longer needs a brain. The parallel for me is that if I want my brain to function well, it’s important to move. Move it or lose it. For me, that means a morning run.

Effects of Physiology on Decision-Making

The author noticed that there were lots of positive feedback loops related to the various hormones in the human body. Take testosterone’s effect. The author noticed that increased risk-taking is generally helpful in making more money on your trades. Studies have shown that increased testosterone is likely to induce risk-taking. If you win, your testosterone increases. If your testosterone increases, so does your risk-taking. This “Winner effect” creates a positive feedback loop where your risk-taking ratchets up as your testosterone increases. Cotes believes that this irrational exuberance is one of the sources of market bubbles. The effect could be even more pronounced in a market environment where the decisions of one risky trader can move the price up and influence others to pile into the stock.

Coates sees the cortisol effect as the exact opposite. During prolonged periods of extended market downturns, stress hormones (like cortisol) ramp up in production. Unlike adrenaline, cortisol stays in the body longer and its effects have a greater impact across time. When our ancestors were in a prolonged period of stress, the threat was usually physical. This physical activity would help lower the cortisol levels naturally. With modern-day “threats” typically not being physically dangerous, modern threats won’t force movement and the cortisol levels can stay elevated. Another really important example of why people need to move their bodies.

The author offers some solutions to help combat the effects of hormones. One is to hire more female traders or older males. On average, they have lower testosterone levels and are therefore less susceptible to the mania of the winner effect. This suggestion is interesting at the firm level but doesn’t do much for the individual. Checklists and other processes that force you to think about your trades can reduce the impact of your hormone’s influence. This isn’t perfect because you can fill out the checklist more positively than you would otherwise with lower testosterone levels.

Summary:

Our body has a large influence on the functionality of our brain. Hormones from your body (testosterone, cortisol, adrenaline, etc) can have a large influence on your decision-making process. Our brains have also been designed with motion in mind. This effect shows up in market bubbles, both during the rise and the fall.

Physical movement can help your brain/body function better. Exercise can help clear cortisol and other hormones that build up from modern-day threats that require no physical response from our body.

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Note that this article does not provide personal investment advice and I am not a qualified licensed investment advisor. All information found here is for entertainment or educational purposes only and should not be construed as personal investment advice.