The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind

by John Coates

In one important respect, financial risk carries even graver consequences than brief physical risk. A change in income or social rank tends to linger, so when we take risks in the financial markets we carry with us for months, even years after our bets have settled, an inner biological storm. We are not built to handle such long-term disturbances to our biochemistry. Our defense reactions were designed to switch on in an emergency and then switch off after a matter of minutes or hours, a few days at the most. But an above-average win or loss in the markets, or an ongoing series of wins or losses, can change us, Jekyll-and-Hyde-like, beyond all recognition. On a winning streak we can become euphoric, and our appetite for risk expands so much that we turn manic, foolhardy and puffed up with self-importance. On a losing streak we struggle with fear, reliving the bad moments over and over, so that stress hormones linger in our brains, promoting a pathological risk aversion, even depression, and circulate in our blood, contributing to recurrent viral infections, high blood pressure, abdominal fat build-up and gastric ulcers. Financial risk taking is as much a biological activity, with as many medical consequences, as facing down a grizzly bear.

Economists tend to view the assessment of financial risk as a purely intellectual affair—requiring the calculation of asset returns, probabilities and the optimal allocation of capital—carried on for the most part rationally. But to this bloodless account of decision making I want to add some guts. For recent advances in neuroscience and physiology have shown that when we take risks, including financial risk, we do a lot more than just think about it. We prepare for it physically. Our bodies, expecting action, switch on an emergency network of physiological circuitry, and the resulting surge in electrical and chemical activity feeds back on the brain, affecting the way it thinks. In this way body and brain twine as a single entity, united in the face of challenge. Normally this fusion of body and brain provides us with the fast reactions and gut feelings we need for successful risk taking. But under some circumstances the chemical surges can overwhelm us; and when this happens to traders and investors they come to suffer an irrational exuberance or pessimism that can destabilize the financial markets and wreak havoc on the wider economy.

It has been said of war that it consists of long stretches of boredom punctuated by brief periods of terror, and much the same can be said of trading. There are long stretches of time when little more than a trickle of business flows in through the sales desks, perhaps just enough to keep the restless traders occupied and to pay the bills. With no news of any importance coming across the wire, the market slows, the inertia feeding on itself until price movement grinds to a halt.

Rising levels of testosterone increase Scott’s and Logan’s hemoglobin, and consequently their blood’s capacity to carry oxygen; the testosterone also increases their state of confidence and, crucially, their appetite for risk. For Scott and Logan, this is a moment of transformation, what the French since the Middle Ages have called “the hour between dog and wolf.”

Normally stress is a nasty experience, but not at low levels. At low levels it thrills. A nonthreatening stressor or challenge, like a sporting match, a fast drive, or an exciting market, releases cortisol, and in combination with dopamine, one of the most addictive drugs known to the human brain, it delivers a narcotic hit, a rush, a flow that convinces traders there is no other job in the world.

The rally was almost unprecedented in its speed and magnitude. It was completely unprecedented in the paucity of hard financial data supporting the dot-com and high-tech ventures powering the bull run. In fact, so large was the gap between stock prices and the underlying fundamentals that many legendary investors, betting unsuccessfully against the trend, retired from Wall Street in disgust. Julian Robertson, for instance, founder of the hedge fund Tiger Capital, threw in the towel, saying in effect that the market may have gone crazy but he had not. Robertson and others were right that the market was due for a dreadful day of reckoning, but they also fully understood a point made by the great economist John Maynard Keynes back in the 1930s: that the markets could remain irrational longer than they, the investors, could remain solvent. So

Dotcom

Tom Wolfe nailed this delusional behavior when he described the stars of Wall Street as “Masters of the Universe.” It was this behavior more than anything else that struck me during the dot-com era. For the undeniable fact was, people were changing. The change showed itself not only among the untrained public but also, perhaps even more, among professional traders all along Wall Street. Normally a sober and prudent lot, these traders were becoming by small steps euphoric and delusional. Their minds were frequently troubled by racing thoughts, and their personal habits were changing: they were making do with less sleep—clubbing till 4 a.m.—and seemed to be horny all the time, more than usual at any rate, judging by their lewd comments and the increased amount of porn on their computer screens. More troubling still, they were becoming overconfident in their risk taking, placing bets of ever increasing size and with ever worsening risk-reward trade-offs. I was later to learn that the behavior I was witnessing showed all the symptoms of a clinical condition known as mania (but now I am getting ahead of the story).

These symptoms are not unique to Wall Street: other worlds also manifest them, politics for example. One particularly insightful account of political mania has been provided by David Owen, now Lord Owen. Owen, a former British foreign secretary and one of the founders of the UK Social Democratic Party, has spent most of his life at the very top of British politics. But he is by training a neurologist, and has lately taken to writing about a personality disorder he has observed among political and business leaders, a disorder he calls the hubris syndrome. This syndrome is characterized by recklessness, an inattention to detail, overwhelming self-confidence and contempt for others; all of which, he observes, “can result in disastrous leadership and cause damage on a large scale.” The syndrome, he continues, “is a disorder of the possession of power, particularly power which has been associated with overwhelming success, held for a period of years and with minimal constraint on the leader.” The symptoms Owen describes sound strikingly similar to those I observed on Wall Street, and his account further suggests an important point—that the manic behavior displayed by many traders when on a winning streak comes from more than their newly acquired wealth. It comes equally, perhaps more, from a feeling of consummate power.

I understood the traders’ feelings because I had in previous years been completely caught up in one or two bull markets myself, ones you probably did not hear about unless you read the financial pages, as they were isolated in either the bond or the currency market. And during these periods I too enjoyed above-average profits, felt euphoria and a sense of omnipotence, became the picture of cockiness. Frankly, I cringe when I think about it.

When traders enjoy an extended winning streak they experience a high that is powerfully narcotic. This feeling, as overwhelming as passionate desire or wall-banging anger, is very difficult to control. Any trader knows the feeling, and we all fear its consequences. Under its influence we tend to feel invincible, and to put on such stupid trades, in such large size, that we end up losing more money on them than we made on the winning streak that kindled this feeling of omnipotence in the first place. It has to be understood that traders on a roll are traders under the influence of a drug that has the power to transform them into different people.

women were relatively immune to the frenzy surrounding Internet and high-tech stocks. In fact most of the women I knew, both on Wall Street and off, were quite cynical about the excitement, and as a result were often dismissed as “not getting it,” or worse, resented as perennial killjoys.

In the nineties, one or two people did suggest that irrational exuberance might be driven by a chemical. And then in 2000 Randolph Nesse, a psychiatrist at the University of Michigan, bravely speculated that the dot-com bubble differed from previous ones because the brains of many traders and investors had changed—they were under the influence of now widely prescribed antidepressant drugs, such as Prozac. “Human nature has always given rise to booms and bubbles followed by crashes and depressions,” he argued. “But if investor caution is being inhibited by psychotropic drugs, bubbles could grow larger than usual before they pop, with potentially catastrophic economic and political consequences.”

Other observers of Wall Street, following a similar line of thought, pointed the finger at another culprit: the increasing use of cocaine among bankers.

These rumors of cocaine abuse, at least among traders and asset managers, were mostly exaggerated. (Members of the sales force, especially the salesmen responsible for taking clients out to lap-dancing bars till the wee hours of the morning, may have been another matter.) As for Nesse, his comments received some humorous coverage in the media, and when he spoke at a conf...

During moments of risk taking, competition and triumph, of exuberance, there is one steroid in particular that makes its presence felt and guides our actions—testosterone.

After the battle has been decided the winner emerges with even higher levels of testosterone, the loser with lower levels. The winner, if he proceeds to a next round of competition, does so with already elevated testosterone, and this androgenic priming gives him an edge, helping him win yet again. Scientists have replicated these experiments with athletes, and believe the testosterone feedback loop may explain winning and losing streaks in sports. However, at some point in this winning streak the elevated steroids begin to have the opposite effect on success and survival. Animals experiencing this upward spiral of testosterone and victory have been found after a while to start more fights and to spend more time out in the open, and as a result they suffer an increased mortality. As testosterone levels rise, confidence and risk taking segue into overconfidence and reckless behavior.

The role of testosterone could also explain why women seemed relatively unaffected by the bubble, for they have about 10–20 percent of the testosterone levels of men.

He vividly described injecting a golden, oily substance about three inches into his hip every two weeks: “I can actually feel its power on almost a daily basis,” he reported. “Within hours, and at most a day, I feel a deep surge of energy. It is less edgy than a double espresso, but just as powerful. My attention span shortens. In the two or three days after my shot, I find it harder to concentrate on writing and feel the need to exercise more. My wit is quicker, my mind faster, but my judgment is more impulsive. It is not unlike the kind of rush I get before talking in front of a large audience, or going on a first date, or getting on an airplane, but it suffuses me in a less abrupt and more consistent way. In a word, I feel braced. For what? It scarcely seems to matter.” Sullivan could just as easily have been describing what it feels like to be a trader on a roll.

If testosterone seemed a likely candidate for the molecule of irrational exuberance, another steroid seemed a likely one for the molecule of irrational pessimism—cortisol.

Cortisol is the main hormone of the stress response, a bodywide response to injury or threat. Cortisol works in tandem with adrenaline, but while adrenaline is a fast-acting hormone, taking effect in seconds and having a half-life in the blood of only two to three minutes, cortisol kicks in to support us during a long siege. If you are hiking through the woods and hear a rustle in the bushes, you may suspect the presence of a grizzly bear, so the shot of adrenaline you receive is designed to carry you clear of danger. If the noise turns out to be nothing but wind in the leaves you settle down, and the adrenaline quickly dissipates. But if you are in fact being stalked by a predator and the chase lasts several hours, then cortisol takes over the management of your body. It orders all long-term and metabolically expensive functions of the body, such as digestion, reproduction, growth, storage of energy and after a while even immune function, to stop. At the same time, it begins to break down energy stores and flush the liberated glucose into your blood. In short, cortisol has one main and far-reaching command: glucose now! At this crucial moment in your life, cortisol has in effec...

The research I encountered on steroid hormones thus suggested to me the following hypothesis: testosterone, as predicted by the winner effect, is likely to rise in a bull market, increase risk taking and exaggerate the rally, morphing it into a bubble. Cortisol, on the other hand, is likely to rise in a bear market, make traders dramatically a...

when faced by situations of novelty, uncertainty, opportunity or threat, you feel the things you do because of changes taking place in your body as it prepares for movement.

The amygdala assigns emotional significance to events. Without the amygdala, we would view the world as a collection of uninteresting objects. A charging grizzly bear would impress us as nothing more threatening than a large, moving object.

The brain stem, often called the reptile brain, controls automatic processes such as breathing, heart rate, blood pressure, etc. The cerebellum stores physical skills and fast behavioral reactions; it also contributes to dexterity, balance and coordination. The hypothalamus controls hormones and coordinates electrical and chemical elements of homeostasis. The amygdala processes information for emotional meaning. The neocortex, the most recently evolved layer of the brain, processes discursive thought, planning and voluntary movement. The insula (located on the far side and near the top of the illuminated brain regions) gathers information from the body and assembles it into a sense of our embodied existence.

When fast reactions are demanded it cuts out consciousness altogether and relies instead on reflexes, automatic behavior and what is called “preattentive processing.” Preattentive processing is a type of perception, decision making and movement initiation that occurs without any consultation with your conscious brain, and before it is even aware of what is going on.

At the sound of the first droning of the shells we rush back, in one part of our being, a thousand years. By the animal instinct that is awakened in us we are led and protected. It is not conscious; it is far quicker, much more sure, less fallible, than consciousness. One cannot explain it. A man is walking along without thought or heed;—suddenly he throws himself down on the ground and a storm of fragments flies harmlessly over him;—yet he cannot remember either to have heard the shell coming or to have thought of flinging himself down. But had he not abandoned himself to the impulse he would now be a heap of mangled flesh. It is this other, this second sight in us, that has thrown us to the ground and saved us, without our knowing how.

Neuroscientists have long known that most of what goes on in the brain is preconscious. Compelling evidence of this fact can be found in the work of scientists who have calculated the bandwidth of human consciousness. Researchers at the University of Pennsylvania, for example, have found that the human retina transmits to the brain approximately 10 million bits of information per second, roughly the capacity of an Ethernet connection; and Manfred Zimmermann, a German physiologist, has calculated that our other senses record an additional one million bits of information per second. That gives our senses a total bandwidth of 11 million bits per second. Yet of this massive flow of information no more than about 40 bits per second actually reaches consciousness. We are, in other words, conscious of only a trivial slice of all the information coming into the brain for processing.

A fascinating example of this preconscious processing can be found in a phenomenon known as blindsight. It became a topic first of curiosity and then of medical concern during the First World War, when medics noticed that certain soldiers who had been blinded by a bullet or shell wound to the visual cortex (but whose eyes remained intact) were nonetheless ducking their heads when an object, such as a ball, was tossed over their heads. How could these blind soldiers “see”? They were seeing, it was later discovered, with a more primitive part of the brain. When light enters your eye its signal follows the pathways, described above, back to your visual cortex, a relatively new part of the brain. However, part of the signal also passes down through an area called the superior colliculus, which lies underneath the cortex, in the midbrain (see fig. 5)...

Once the players had the knack, they no longer thought about playing the game. This study, and others like it, supports the old saying that when learning begins we are unconscious of our incompetence, and proceed to a stage where we are conscious of our incompetence; then when training begins we move to conscious competence; and as we master our new skill we arrive at the end point of our training—unconscious competence.

Anecdotal evidence and published fund-performance statistics give us something like the following scorecard: in high-frequency trading, humans and machines fought to a draw, both making historic amounts of money; in medium-term price prediction, in other words seconds to minutes, humans pulled slightly ahead of the boxes, as flow traders made record amounts of money; but in medium-to long-term price prediction, minutes to hours or days—the boxes engaged in these time horizons are known as statistical arbitrage and quantitative equity—humans outperformed the boxes, because only they understood the implications of the political decisions being made by central bankers and Treasury officials. Thus, in what may have been the first major test of human versus machine trading, humans won, but only just. And so it is that this futuristic battle ebbs and flows.

Recent research in physiology and neuroscience has discovered that gut feelings are more than the stuff of legend; they are real physiological entities. Gut feelings emerge from a massive information-gathering exercise conducted by the body. And the body, as we will see, remains the most advanced black box ever created.

What evidence is there that signals our brain receives from the body can help with our higher decisions? Recently there has been quite a bit of evidence. The signals flowing from the body to the brain act silently, hardly breaking the surface of consciousness, giving us a diffuse and barely perceptible sense of the body, but nonetheless act powerfully, influencing our every decision. Not only that, but without their guiding hand even the cold rationality of economic man cannot make any progress. Gut feelings are not only real; they are essential to rational choice. The necessity of gut feelings becomes all the more apparent when decisions have to be made quickly, when we are online and in the flow, as Martin was this morning when given a minute or two to price the DuPont trade and then half an hour or so to buy the bonds he sold. In situations like these he does not have the leisure to gather all relevant data, consider all possible options, probability-weight their outcomes and systematically work through a decision tree as an engineer might when given months, years even, to solve a problem.

When pressed for a decision Martin therefore needs help in drawing up a shortlist of options and their likely consequences. It is in this process that his gut feelings are brought in to streamline his thinking.

Chess grandmasters, for example, are said to store up to ten thousand board configurations which they access for clues on what to do next. Intuition is thus nothing more mysterious than recognition.

Given this point, Kahneman and Klein went on to conclude that intuitions can be relied on only if two conditions are met: first, people can develop an expertise only if they work in an environment that is regular enough to produce repeating patterns; and second, they must encounter the patterns frequently and receive feedback on their performance quickly, for only in this way can they learn. Playing chess exemplifies these conditions: chess grandmasters play game after game, the rules are fixed and they find out quickly if their moves were right or not. Much the same can be said of paramedics, firefighters and fighter pilots. Political forecasters, on the other hand, inhabit a world that is far too fluid and complex to produce patterns, and even if something like a pattern does emerge, it does so with such a long time lag that learning it may take a lifetime. “Remember this rule,” advises Kahneman: “Intuition cannot be trusted in the absence of stable regularities in the environment.”

The question for us becomes, do the financial markets present stable regularities? Only if they do can traders and investors rely on their hunches. Within economics, opinions on this question have been close to unanimous: the markets do not. The strongest statement to this effect comes from the Efficient Markets Hypothesis in economics. According to the economists arguing for this hypothesis, the market moves when new information arrives, and since news by its very nature cannot be predicted, neither can the market. The legend of traders and investors heroically drawing on gut feelings is, they argue, pure mythology. No one can predict the market, nor consistently outperform it. But is this true? The Yale economist Robert Shiller suspects it is not. He does not buy the idea that nothing—no personal trait, no training—can improve a trader’s performance. Shiller believes, on the contrary, that investing is like any other occupation, and that intelligence, education, training and hard work can indeed improve your performance. I think he is right. I also suspect that the Efficient Market Hypothesis has been a boon to many of the physicists, engineers and code-breakers employed by he...

We found that the experienced traders who consistently made money, even through the credit crisis, were ones whose Sharpe Ratios had risen over their careers. When we plotted their ratios against the number of years they had been in the business we found a nice upward slope, indicating that they had been learning to make more money with less risk. Shiller was right: training and effort do pay off in the markets.

A couple of points follow from this discussion of intuition and hunches and our data on the Sharpe Ratio. First, there does appear to be such a thing as trading skill. The financial markets seem to meet Kahneman and Klein’s criteria for an environment in which intuitions can be trusted. It is not surprising therefore that discussions between traders frequently compare the current market to something they have traded through before—“This credit crisis feels just like the Russian default in ’98. I bet the yen rallies.” Most of a trader’s dialogue, however, remains internal and preconscious, a good trader listening attentively to whispers from the past. Second, the question that often crops up in discussions of intuition—which is more reliable, intuition or conscious rationality?—is something of a red herring. We inevitably use both. If we tried to use nothing but conscious rationality, tried to emulate Spock, we would find ourselves uncontrollably thrown back for most of our decisions on fast, online thinking. The question of whether the resulting decisions are trustworthy is not one that can be answered once and for all—“Yes, always trust your hunches,” or “No, work out a decision tree.” Its answer will depend on your training. We should not be asking if we should trust our intuitions; we should be asking how we can train ourselves to possess a skill that can be relied on.

There is in fact a connection between preconscious decisions and the body, because it is gut feelings that allow us to rapidly assess whether a pattern and a considered choice will most likely lead to a pleasant or a nasty outcome, whether we like or dislike, welcome or fear it. Without such visceral coloring we would be lost in a sea of possibilities, unable to choose—a situation the cognitive psychologist Dylan Evans has called “the Hamlet Problem.” We may be gifted with considerable rational powers, but to solve a problem with them we must first be able to narrow down the potentially limitless amount of information, options and consequences. We face a tricky problem of limiting our search, and to solve it we rely on emotions and gut feelings.

Such is the conclusion drawn by two neuroscientists, Antonio Damasio and Antoine Bechara. Working with patients who had damage to one particular part of the brain which integrates signals from the body, Damasio and Bechara found that these patients could have perfectly normal, even exceptional, cognitive abilities, yet make terrible decisions in their lives. Perhaps, Damasio and Bechara surmised, the patients’ IQs counted for little in making good decisions because they were deprived of help from their bodies, from homeostatic and emotional feedback. They concluded that “feeling was an integral component of the machinery of reason.” To account for the decision making impairments of these and similar patients, Damasio and Bechara developed their Somatic Marker Hypothesis. According to this hypothesis, each event we store in memory comes bookmarked with the bodily sensations—Damasio and Bechara call these “somatic markers”—we felt at the time of living through it for the first time; and these help us decide what to do when we find ourselves in a similar situation. When we scroll through the options open to us, each may present itself with a subtle tensing of muscles, a quickening of breath, a slight shiver of dread, a brief moment of calm, a frisson of excitement—until one just feels right. These bookmarks are especially memorable, and most urgently needed, when we take a risk, for risk can hurt us, physically and financially. So it is little wonder that tales of gut feeling...

In a more formal experiment, a group of radiologists in Miami measured glucose use by the brain during a verbal fluency task, which required participants to list as many words as possible beginning with a given letter in a short space of time. They found that people performing this simple task drew 23 percent more glucose into their brains than they did when at rest. Disturbingly, a group of psychologists at Florida State, also looking at glucose levels in the brain, found that during taxing mental (as well as physical) activities our glucose reserves become depleted, and this reduces our capacity for self-control. They concluded that allocation of energetic resources during emergencies follows a “last in, first out” rule, according to which mental abilities that developed last in our evolutionary history, like self-control, are the first to be rationed when fuel is low. Muscles, which draw a small amount of glucose when at rest, come to monopolize available resources during physical activity. The preferential treatment of muscles during a fight, or when playing a sport, for that matter, and the rationing of glucose to the brain regions responsible for self-control, might explain why fights so easily run out of control (hockey seems especially prone). Perhaps the same could be said of our self-control when we are working long hours at the office—we tend to snap more easily—or trying to stick to a diet, since the draining of glucose also drains us of resolve.

In feedback a thought affects the body, and the changes taking place in the body then feed back on the brain, changing the way it thinks. Take a simple example of the process: when you feel depressed you may decide, in a moment of self-assertion, to pick yourself up and battle on, forcing a smile, straightening your posture, walking more briskly; and in time these changes may actually work, you may end up feeling happier. Here changes in your body—its posture, facial expression, etc.—have fed back on your brain and changed the thoughts you think. Body–brain feedback of this sort can even, under some circumstances, turn into runaway reactions which end in extreme behavior. When you are scared, for example, your heart beats faster, you sweat, hyperventilate and run away from a supposed threat. As you become aware of these symptoms you can start to worry even more, and the stage is set for a full-fledged panic attack.

It is possible that people with more labile faces simply become habituated to their facial antics, and that a poker-faced Brit might succumb to an outwardly unseen emotional torrent caused by little more than a twitch of the mouth or a furtive glance. On the other hand, people who inject botox into their cheeks, foreheads and eye creases, thereby anesthetizing their facial muscles, may be dampening their emotional and indeed their cognitive reactions. Ironically, it is often movie actors who do so, yet if there is any truth to the theory of Method acting, according to which you should conjure up a real emotion rather than artfully fake it, then these actors may be killing their very talent.

Levenson and Ekman found that by moving their facial muscles alone, without any emotive input, the subjects had come to feel the mood portrayed on their faces. Extraordinary research. In fact, just as William James had predicted. He too recognized that muscles can communicate an emotional feeling to the brain. Even when our muscles appear outwardly unchanged, he wrote, “their inward tension alters to suit each varying mood, and is felt as a difference of tone or of strain. In depression the flexors tend to prevail; in elation or belligerent excitement the extensors take the lead.”

The vagus nerve, the main nerve in the rest-and-digest nervous system, links the brain stem, voice box, lungs, heart, pancreas and gut. In total, 80 percent of its fibers carry information back to the brain, mostly from the heart and gut. The enteric nervous system, often called the second brain, is an independent nervous system controlling digestion. The brain in the gut and the brain in the head communicate and cooperate (and occasionally disagree) largely by means of the vagus nerve.

Emotions and moods are different; they operate over different time scales. Emotions are short-lived. It has been suggested that emotions are designed to be fleeting, because they provide our brain with valuable and timely information. If they were to persist, they would interfere with other, newer information being brought to our attention. A mood is slower, more like a long-term attitude, a background and slow-burning emotion which slants our view on the world. Emotions and moods alter Gwen’s attitude to events, tinker with the memories she recalls, change the way she thinks.

Preconscious regions of the brain rapidly register a threat. Muscles then prime us for quick action; the visceral nervous system supports the muscles with glucose, oxygen, etc.; and over hours to days steroids prepare us for a long-term challenge. All these bodily changes feed back on the brain and register preconsciously as gut feelings and consciously as emotions or moods. Emotions and moods ensure that conscious thoughts synchronize with the state of the body to produce coherent behavior, such as anger, fear or happiness.

In time, though, I realized I needed more than these cognitive operations. Often, while looking at a problem head-on and coming to some obvious solution I would catch a glimpse with peripheral vision of another possibility, another path into the future. It showed up as a mere blip in my consciousness, a momentary tug on my attention, but it was a flash of insight coupled with a gut feeling that gave it the imprimatur of the highly probable. An experienced trader, I think, learns to recognize these voices speaking from the fringes of awareness. To trade well you have to tear your attention away—and it can take a great deal of discipline—from the obvious piece of analysis lying under your nose, and listen to these faint voices.

LISTENING TO OUR BODY And what an angelic choir they make. If only we could hear their music loudly and clearly, we would have at our disposal some of the most valuable signals in all the financial markets. For our bodies, and the preconscious parts of the brain, both cortical and subcortical, act as large and sensitive parabolic reflectors, registering a wealth of predictive information. They remain the most sensitive and sophisticated black boxes ever designed. When correlations between assets break down, when new correlations emerge, chances are our muscles, heart rate and blood pressure will register the changes before our conscious awareness. Just as galvanic skin conductance in the Iowa Gambling Task spikes before someone chooses cards from the losing decks, so too the bodies of experienced traders snap to attention well before they consciously understand the risks they are contemplating. Bodily signals, running ahead of consciousness, cry a warning. Yet traders often fail to heed them, because these messages are notoriously, frustratingly hard to hear. They fade in and out like a radio picking up a distant station, and leave us hanging on their every note, or worse, overinterpreting a burst of static. Our bodies and the preconscious regions of the brain may hear these songs clearly, and know what to do with the information they carry, but our conscious brain has only the most tenuous access to them. In fact our conscious brain has surprisingly little grasp of what m...

A host of similar experiments have been conducted by Timothy Wilson and are reported in his book Strangers to Ourselves. He, like LeDoux and Gazzaniga, has found that people constantly trick themselves into thinking they understand the true springs of their actions. But the commentary people provide on their behavior is often a meaningless accompaniment to action taken by preconscious parts of the brain. LeDoux, puzzling over his own and Wilson’s observations, concluded that “people normally do all sorts of things for reasons they are not consciously aware (because the behavior is produced by brain systems that operate unconsciously) and that one of the main jobs of consciousness is to keep our life tied together into a coherent story, a self-concept.” In other words, we make things up. I found a disturbingly similar result in an experiment I conducted with a group of traders. I and a colleague were trying to find out how stress hormones respond to losing money and to high volatility in the markets. What we found was exactly what one would expect on the basis of previous stress research: the traders’ stress hormones were remarkably sensitive to uncontrollability in their trading...