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Psychology: Markets in mind

Nature volume 486, page 32 (07 June 2012) | Download Citation

Investment bankers are addicts on a steroid roller coaster, finds Richard Lea.

The Hour Between Dog and Wolf: Risk-taking, Gut Feelings and the Biology of Boom and Bust


Fourth Estate/Penguin: 2012. 288/352 pp. £20/$27.95 9781594203381

René Descartes may have sparked the Enlightenment when he proposed that thought is the basis for existence, but Cartesian mind–body dualism has fallen out of favour in philosophy. According to neuroscientist John Coates, however, there is one domain in which the idea of a mind driven by pure rationality persists: economics.

In The Hour Between Dog and Wolf, Coates tests this to breaking point, with an area of economics where rationality does not rule. Using physiology and neuroscience, and grounded by 12 years working in New York's financial district, Coates paints a vivid picture of stockbrokers as thrill junkies, surfing waves of boom and bust on steroid hormones.

Coates suggests ways to calm those waves, but his prescription doesn't go far enough. He focuses on strategies for controlling the testosterone highs of the “Masters of the Universe” — as Tom Wolfe styled them in The Bonfire of the Vanities (Farrar, Straus and Giroux, 1987) — instead of restructuring a financial system that currently “balances precariously on the mental health of these risk takers”.

Coates begins with a vibrant portrait of a Wall Street investment bank as the markets prepare for an interest-rate announcement. He conjures up the excitement of the trading floor, a “parabolic reflector” gathering information and registering early signals. Traders pick up on this information through a hunch or gut feeling, and act on it fast.

Alongside some novelistic vignettes — the head of department surveying the floor like a hound on the scent — Coates describes the neurological and physiological changes that bankers experience. For example, when stockbrokers hear a rumour that interest rates will rise, their brains put them into high alert: they “hear the faintest sound, notice the slightest movement”. Their metabolisms accelerate, breathing quickens and blood shunts to major muscle groups. Their bodies are flooded with adrenaline and testosterone.

Turning to the dialogue between brain and body, Coates says that physiology is key in decision-making. Decisions imply action, so “our thoughts come freighted with physical implications”. Traders, like soldiers, make snap decisions with much at stake, so they must listen to the signals from their bodies.

Coates presents his own research from a London firm. He found a link between traders' morning levels of testosterone and afternoon profits, as well as a substantial increase in cortisol during volatile markets. He saw this chemistry in action on Wall Street: traders on a roll, in clubs and prowling for sex, and the men's toilets exuding a slaughterhouse stench as the market tumbled.

When testosterone levels rise during a bull market, with successes following each other so rapidly that there is no time for hormone levels to return to normal, stockbrokers can fall prey to the “irrational exuberance” that powers a bubble. During a declining 'bear' market, sustained levels of cortisol can fuel the panic before a crash and even, Coates suggests, contribute to hypertension and type 2 diabetes in individuals. A system that evolved to respond to physical threats over seconds or hours — the leopard in the forest, the rival in the group — is unable to cope with threats that evolve over weeks or months.

The drawbacks of Coates's familiarity with the trading floor become plain when he proposes fixes. Perhaps traders will be less stressed if they practise yoga or take up a wind instrument as he suggests, but his broader solutions — such as restraint from middle management, increased gender equality and the sinister idea of sending traders home on the results of a morning blood test — seem inadequate as counters to the powerful physiological influences on decision-making.

Coates's other solutions need some rethinking too. His idea of offering traders rewards on the basis of long-term results should be extended to managers and companies. Instead of adding “audio price feeds” to the trading floor to decrease traders' reaction times, a financial-transaction tax should be introduced to reduce market volatility.

If market swings are as driven by hormones as Coates suggests, it is not enough for politicians to step in when stress in the financial world has become pathological. They must decouple irrational exuberance on Wall Street from misery on the high street. Readers reeling from the effects of the most recent financial Armageddon may feel that the Universe needs some new masters.

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  1. Richard Lea is a journalist on the books desk at The Guardian in London.

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Correspondence to Richard Lea.

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