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

by John Coates

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 hedge funds, for these scientists have been able to find tradable patterns in what efficient market theorists believed was pure noise, and to build algorithms to exploit these patterns. Efficient market theory, because it has been orthodoxy for decades, may have limited the number of competitors looki...