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The Hour Between Dog And Wolf: Risk Taking, Gut Feelings And The Biology Of Boom And Bust (2012)

by John M. Coates(Favorite Author)

3.88 of 5 Votes: 3

ISBN

0307359670 (ISBN13: 9780307359674)

languge

English

genre

Nonfiction

publisher

Random House Canada

review 1: Is there a duck nearby? Because I hear a quack. In this book, Coates posits that rather than the rational economic beings we like to think make major financial decisions, we are actually driven by physiological impulses much more so than intelligent thought. I'll give Coates props for knowing his biology --but that's about the only redeeming characteristic of this book. First, I'm not sure what is particularly novel about his theory. There's been a lot of attention paid to these issues since 2008 and I think most people have acknowledged that traders are sort of an elevated form of gambler, reacting to the ebb and flow of the markets in the same way that a gambler reacts to the turn of the roulette table. Coates describes the biology behind that -- the testosterone t... morehat can lead to "irrational exuberance" and the cortisol that leads to "irrational pessimism". That's all fine and not particularly earth-shattering. But then he discusses some pretty bizarre theories -- for example, that the amount of pre-natal testosterone exposure experienced by traders could be predictive of their trading acumen in later life. He measures this by taking handprints of a series of traders and gathering the ratio of their index and ring fingers (2D:4D ratio) which is supposedly an indicator of such exposure. Then he compares results to the traders' P&Ls, specifically their Sharpe ratios and supposedly finds relationships. Or when he discusses how markets always seem to crash in October -- and perhaps that's because of the falling testosterone of the male traders during this time of year... "Maybe in the autumn traders' animal spirits give up the ghost and risk taking dims, taking stock market prices down...I might point out another oddity in the stock markets, and that is their observed tendency to outperforming on sunny days and underperform between autumn equinox and winter solstice which is sometimes attributed to seasonal affective disorder. Perhaps this too is tracked back to testosterone levels..." At the end he discusses possible solutions to the situation. Since women have 10-20% less testosterone than men, they typically are less affected by irrational exuberance and pessimism and can retain cooler heads on trading floors. So a reasonable solution is to recruit more women since only about 5% of traders are female. Also, since older men have less testosterone, a greater mix of young and old would be worthwhile. These are not terrible solutions, though I'm not sure how they are implemented. Or he says, let's change the bonus structure and pay out every 5 years so that we don't continue to encourage short sighted gains and risk-taking. Ok, but what about talent aquisition? Do we limit irrational behavior only to lose all of the most intelligent people in the field who are unwilling to sit and wait 5 years for their compensation, particularly in this day and age? And that's pretty much all he's got from a solution standpoint. Overall, just very disappointing.
review 2: There is a great book here somewhere, but this one isn't it. Just when we are starting to get used to the idea of irrationality in human behaviour impacting economic decision making, Mr.Coates goes one level deeper still. Human physiology, and its evolutionary history, he argues, play a key role in expanding asset bubbles in the financial markets beyond rational limits, and play an equally devastating role in markets crashes becoming deeper and longer than they need to be. The basic premise is solidly put together, as is the role of key hormones like adrenaline and cortisone in driving behaviour of traders on the trading floor. That said, the real evidence in favour of his arguments are too sparse, and thinly grounded. I guess there just aren't enough people out there yet who are biologically literate and well versed in financial markets as well. So much of the case in the book is based on a handful of experiments Mr.Coates has been able to do on a couple of trading floors. The insights do pass the smell test, and probably will be proven better over time. But right now, there just isn't enough evidence (as shown in the book) to call testosterone the "fuel of exuberance" in the markets - and no, correlation data showing trading profits of 17 traders vs their testosterone levels in the morning, while a start, isn't quite enough. Nor did I find enough evidence shown in the book to support the bear market claim that "cortisol is the molecule of irrational pessimism". Mr. Coates likely suffers from the fact that he is one of the first to start exploring this space. There isn't much in terms of established literature or research that he can lean on. Over time, that may well accumulate. But right now, "The Hour Between Dog and Wolf" tastes half baked. less

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