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

by John Coates

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.