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

by John Coates

Experiments with heartbeat awareness have found this marker is a good proxy for visceral awareness. The experiments have also found that heartbeat awareness is lower in people who are overweight. Perhaps this is one reason trading floors are populated with relatively fit young people.

This research raises the possibility of using tests of interoceptive awareness as a recruitment tool, to be used alongside regular interviews and psychometric testing, to help spot risk takers with good gut feelings. Could we also monitor traders’ gut feelings while they take risks? Today a range of monitors can record heart rate, pulse, respiratory cycle, galvanic skin conductance and so on, and do so noninvasively. In fact, physiological monitoring of traders has been suggested by the magazine The Economist, when reporting on a result that emerged from one of our studies, mentioned earlier, on hormones in traders.

That study had found that when morning levels of testosterone in male traders were higher than average, the traders went on to make an above-average profit later that day. The reporter for The Economist suggested that traders could test themselves first thing in the morning, and if their biochemistry was not right, they should just go home. It sounds far-fetched, but this practice is already common in sports. Many sports scientists monitor their athletes’ physiology nonstop, and look for just these sorts of signs that they are either ready for an upcoming match or need more work. In fact, today we are in a position to do the physiological spot checks suggested by The Economist. S...

In the future we might even be able to articulate the specific messages carried by our interoceptive pathways. Our conscious brain may have difficulty doing so, but science can help by intercepting and interpreting these messages. Someday we will be able to listen to our bodies and the subconscious regions of our brains and heed their warnings. Physiological monitoring devices, along with the computer backup mentioned in the previous chapter, may one day provide human traders ...

Challenge, recovery, challenge, recovery—that is what toughens us. And that is why this trade has been good for Martin. He has benefited from just such a pattern of stress and recovery and has emerged a stronger—and indeed a richer—person. At this very moment, throughout his body, in a million different war zones, microscopic surgeons and nurses go to work repairing damage to tissues, tending to his every comfort—and brother, does it feel good.

The locus ceruleus projects noradrenaline up into higher regions of the brain where it makes our senses more acute and raises the signal-to-noise ratio of incoming information so we can focus on a current threat or opportunity. It also projects down into the body where it triggers the fight-or-flight response. Dopamine-producing cells in the brain stem project up to the basal ganglia; one of their target areas here is the nucleus accumbens, often called the thrill center of the brain. Dopamine encourages us to engage in physical activities—like hunting, foraging and trading—that lead to uncertain rewards.

Food can raise an animal’s dopamine levels by 50 percent, sex by 100 percent. However, nicotine can raise them by 200 percent, cocaine by 400 percent and amphetamines by 1,000 percent.

Other chemicals in the brain, such as natural opioids, may provide the pleasure of actual drinking, but perhaps dopamine provides something that is closer to a desire, even a craving. Desire is more of an anticipatory feeling, but is nonetheless powerfully motivating and in some sense enjoyable, although at times it can be more like a maddening itch. Two of the scientists conducting this groundbreaking research, Kent Berridge and Terry Robinson, concluded that dopamine stimulates the wanting of juice rather than the liking of it.

There is another wrinkle to the dopamine-as-craving story. Give a monkey a single squirt of juice and its brain shows a spike of dopamine, but repeat the process several times and eventually the dopamine neurons settle down. But now give the monkey two squirts when it expected one, and dopamine perks up once again. Give it three squirts and dopamine perks up even more. Yet if these three squirts are now repeated, dopamine once again settles back down.

What this means is that the amount of dopamine released into the nucleus accumbens does not depend on the absolute amount of reward an animal receives, but on how unexpected it is. This further suggests that we enjoy and crave environments in which we receive unexpected rewards; in other words, we enjoy risk. Put another way, dopamine spikes with information; and it acts as a learning signal, making us remember what we have just discovered. Some neuroscientists, such as Jon Horvitz at Columbia and Peter Redgrave at Sheffield, have even gone beyond the dopamine-as-predictor-of-pleasure idea and controversially argued that any experience, even an unpleasant one, that helps us predict future sources of pleasure and pain can deliver a shot of dopamine.

In order to kick a habit they now find unpleasant, addicts often find they have to separate themselves from drug-taking cues by changing neighborhoods and avoiding old friends. Many antidrug advertising campaigns have backfired by misunderstanding this point. These campaigns often featured images depicting the horrors of addiction, maybe a bloody syringe and a dark alley; but these images were the very ones predicting the consumption of drugs, and therefore delivered a large dopamine hit in many reformed addicts, perversely renewing their craving and driving them back to heroin or cocaine.

Trading provides some of the highest rewards available in our economy, but they are highly uncertain, and attaining them entails predicting the future and taking huge risks. So it may be dopamine that delivers the powerful high traders feel when their trades work out. It is no wonder many observers suspect that traders on a roll may be in the grips of an addiction. And like an addict who quickly habituates to a given dose of a drug and has to continually increase the hit, traders too may habituate to certain levels of risk and profit, and be irresistibly compelled to up their position size beyond what would normally be considered prudent.

If we pull together the various strands of research on dopamine, we could say the following: dopamine surges most powerfully when we perform a novel physical action that leads to unexpected reward. Dopamine drives us to push beyond established routines and to try new search patterns and hunting techniques. As a result, the effects of dopamine on the course of evolution have been revolutionary. According to Fred Previc, a psychologist at Texas A&M University, the rapid growth of dopamine-producing cells, the result of ancient dietary changes such as an increase in the eating of meat, changed history. It encouraged us to take risks just for the hell of it, independently of any rational expectation of gain.

What he did in his study was place rats in a bare cage with two bottles they could drink from, one of which contained water, the other water laced with morphine. Not surprisingly, the rats preferred the bottle laced with morphine, and in time they became addicted to it. What Alexander did next was interesting. He repeated the experiment, only this time he placed the rats inside what he called Rat Park, a cage with a running wheel, foliage, other rats, both male and female, and so on. In other words, he provided the rats with an enriched environment. When placed in Rat Park the rats did not prefer the morphine-laced water, and did not develop an addiction.

I sampled testosterone from seventeen of these traders and recorded P&L over a two-week period. What we found was that their testosterone levels were significantly higher on days when they made an above-average profit. More intriguing, though, was what we found when we looked at testosterone levels in the morning, because these predicted how much money the traders would make in the afternoon. When the traders’ morning testosterone levels were high, they went on to make a lot more money in the afternoon than they did on days when their morning testosterone levels were low (see fig. 9).

Elevated testosterone, and the larger or more ornamented body it promotes, is energetically expensive, and can eventually wear down an animal’s body. Castrate a male animal and it can live up to 30 percent longer. High-testosterone males thus end up paying a high price for their show of strength and their triumphs, in the form of a higher rate of mortality. It has been said that there is a certain tragic glory to these highly charged males—“The candle that burns twice as bright burns half as long.”

In many animals testosterone levels fluctuate over the course of the year, and in humans these levels rise until the autumn, and then fall until the spring. This autumnal drop in testosterone can lead animals into a condition called “irritable male syndrome,” in which they become moody, withdrawn and depressed. So maybe, just maybe, in the autumn traders’ animal spirits give up the ghost and risk taking dims, taking stock markets down.

Crucially, cortisol also reverses the body’s anabolic processes. While an anabolic process builds up energy reserves, a catabolic process breaks them down for immediate use. Cortisol, as a catabolic steroid, blocks the effects of both testosterone and insulin; and it causes glycogen deposits to be broken down into glucose; fat cells into free fatty acids, an alternative energy source; and muscles into amino acids, which are then shunted to the liver to be converted into glucose. Cortisol has further effects in preparing us for a crisis: it suppresses the reproductive tract by inhibiting the synthesis of testosterone and sperm in men, and estrogen and ovulation in women.

During the Blitz in the Second World War, for example, the inhabitants of central London were exposed to daily, predictable bombing, while inhabitants of the city’s outer suburbs were exposed to intermittent and unpredictable raids. It was in the suburbs that doctors found a higher incidence of gastric ulcers.

In the normal course of events steroid hormones spike when we wake in the morning, this steroid surge acting much like a breakfast cup of coffee, and then decline over the course of the day. In this experiment we should have observed traders’ cortisol levels dropping by about 50 percent from morning to afternoon sampling times, but on volatile days they actually increased over the course of the day, some of them by an astonishing 500 percent, levels normally seen only in clinical patients.

Research has suggested that optimistic people, those who are used to things working out, may not handle recurrent failure very well, and may end up with an impaired immune system and increased illness. Bankers, so well suited to the bull market, may be constitutionally ill prepared to handle bear markets.

A study conducted in Sweden with forty thousand people over a sixteen-year period found that health was strongly correlated with the business cycle, with mortality from cardiovascular disease, cancer and suicide all increasing during recessions.

One study has found that during 2007–9 there was a spike in the rate of heart attacks in London, and this occurred against a backdrop of a decreasing incidence of heart attacks in the rest of the UK. The authors estimate that this surge in heart attacks in London led to an additional two thousand deaths, and resulted, they suggest, from the impact of the credit crisis on the financial district. A market crash may thus produce not only an economic disaster but also a medical one.

Economists and central bankers, such as Alan Greenspan, refer to an irrational pessimism upsetting the markets, just as John Maynard Keynes once spoke of the dimming of animal spirits. With the development of modern neuroscience and endocrinology we can begin to provide a scientific explanation for these colorful phrases: cortisol is the molecule of irrational pessimism.

Some scientists, recognizing that mental toughness corresponds to a physiological profile, have gone a step further and asked, can this toughness be trained? Can purely physical training regimes translate into emotional stability, mental endurance and improved cognitive performance? Scientists who think the answer is yes have built their research upon a curious finding—that resilience to stress comes from experiencing stress. This idea originated in a lab at Rockefeller run by a psychologist named Neal Miller. Miller was one of the fathers of what is called behavioral medicine, the idea that behavioral therapy can rewire our brain and rebuild our body just as thoroughly as many medications. He and his lab also conducted some pioneering experiments in the physiology of stress. It was in Miller’s lab that two of his students, Bruce McEwen and Jay Weiss, discovered cortisol receptors in the brain, and in the process described the hormone feedback loops between brain and body, which, I have suggested, may be influential in the financial markets. Miller also made some of the first discoveries about toughening. In particular, he and Weiss found that when rats were exposed to chronic (in other words unrelenting) stress they came to suffer both physical illness and learned helplessness, and these were the result of depleted noradrenaline levels in their brains. However, if the rats were exposed to acute (in other words short-lived) stress, even if it was repeated over and over, th...

This freeze response was subsequently passed on to mammals, in which it proved useful as a way of feigning death when a threat loomed. Something like the freeze response is also activated in mammals living or feeding in water, such as seals, in order to slow heart rate and metabolism and conserve oxygen when diving to great depths. The vagal freezing response lingers to this day in most mammals, and can show up under circumstances of extreme danger. When escape from a predator is deemed impossible, a mammal can call on this ancient reaction, and its physiological systems will more or less shut down. Movement ceases, breathing slows, heart rate drops, sensitivity to pain decreases—pathetically, the animal may provoke cardiac arrest and die from its own reaction to threat rather than from the predator itself.

Young rats that are handled by humans will develop larger adrenal glands, but nonetheless as adults will show a more muted stress response to threats. They also tend to live longer, one study finding a life expectancy 18 percent longer than that of nonstressed rats. The acute stressors must, however, be acute and moderate, for the same research showed that major stressors early in life, such as maternal separation, foster an anxious adult ill prepared to deal with the slings and arrows of normal life events. The training or toughening effects of acute intermittent stress can also be observed in adult rats. These stressors may include handling by humans, running on an exercise wheel, mild shock, even having their amines depleted by drugs. It does not seem to matter that much what the stressor is. The stress response is a general, bodywide reaction, so any stressor can exercise it. Each of these stressors, if brief and repeated, could toughen the rats. Call it the school of hard knocks.

What stressors could contribute to toughening in humans? Research on toughening regimes is still in its infancy, but a few types of stressors nonetheless crop up in the literature. The most important, not surprisingly, is exercise. Humans are built to move, so move we should. The more research emerges on physical exercise, the more we find that its benefits extend far beyond our muscles and cardiovascular systems. Exercise expands the productive capacity of our amine-producing cells, helping to inoculate us against anxiety, stress, depression and learned helplessness. It also floods our brains with what are called growth factors, and these keep existing neurons young and new neurons growing—some scientists call these growth factors “brain fertilizer”—so our brains are strengthened against stress and aging.

A well-designed regime of physical exercise can be a boot camp for the brain. In the future, however, the advice to exercise, administered so liberally by doctors everywhere, could be made more effective by being more explicit. What type of exercise? Anabolic or anaerobic? How often? Once again, sports science could help enormously in tailoring this advice to the person receiving it. One type of toughening regime is especially intriguing, and that is exposure to cold weather, even to cold water. Scientists have found that rats swimming regularly in cold water develop the capacity to mount a quick and powerful arousal, relying on adrenaline more than cortisol, and to switch it off just as quickly. When subsequently exposed to stressors they are not as prone to learned helplessness. Some tentative research has suggested that much the same thing occurs in humans. People who are regularly exposed to cold weather or who swim in cool water may have undergone an effective toughening regime that has made them more emotionally stable when confronted by prolonged str...

Recall that thermoregulation represented a revolutionary advance for mammals, profoundly altering their bodies, their brains and the network of connections between the two; and that it proved particularly so for early humans, whose superior ability to cool their bodies gave them an edge on the African savannah. Some scientists have even claimed that the nervous system supporting thermoregulation in mammals laid the foundation for later systems of emotional arousal. Dienstbier has ela...

Thermal stress is a natural part of our life, so if it is eliminated a fundamental part of our physiology may atrophy. The great physiologist Walter Cannon hinted at something like this back in the 1920s. Displaying an extraordinary prescience, he worried about the advent of central heating, air conditioning and hot running water, because these conveniences threatened to deprive us of the opportunity of exercising our systems of thermoregulation. “It is not impossible,” Cannon warned, “that we lose important protective advantages by failing to exercise these physiological mechanisms, which were developed through myriads of generations of our less favored ancestors. The man who daily takes a cold bath and works until he sweats may be keeping ‘fit,’ because he is not permitting a very valuable part of his bodily organization to become weakened and inefficient by disuse.” Today we may be paying a high price for our modern comforts. In fact, Cannon’s fears of a decline in fitness may have been justified: recent evidence suggests that the widespread adoption of climate control in home, car and office may be one cause of the current obesity epidemic. The disappearance of thermal stres...

A telling example can be found in our understanding of mental fatigue. Common sense tells us that it is a state of exhaustion, in which we have quite simply run out of energy, like a car running out of gas. The recommendation that naturally follows is a rest or vacation to replenish our energy reserves. Exhaustion of this kind certainly occurs. Run a marathon, and chances are you end up in a state of exhaustion; pull an all-nighter, and chances are you need some sleep. But more often than not, this is not the cause of mental fatigue. Often, mental fatigue disappears if we merely change activities, and that would not happen if we had exhausted our fuel. A recently developed model in neuroscience provides an alternative explanation of fatigue. According to this model, fatigue should be understood as a signal our body and brain use to inform us that the expected return from our current activity has dropped below its metabolic cost. The brain quietly searches for the optimal allocation of attentional and metabolic resources, and fatigue is one way it communicates its results. If we are engaged in some form of search and have not turned up any results, our brain, through the language of fatigue and distractibility, tells us we are wasting our time and encourages us to look elsewhere. The cure for fatigue, according to this account, is not a rest; it is a fresh task. Support for this idea comes from data showing that overtime work does not in itself lead to work-related illness ...

We may not be able to control the financial markets, but we can exert some control over our own bodies, what we eat, how often we go to the gym, who we spend time with, etc. By doing so we gain a toehold amid the chaos, and this can convince us—delude us, if you will—into believing we are in charge. It may be an illusion, and it may not stop you from losing money or even being fired, but it can help reduce the long-term damage to your body. Another powerful antidote to the physical damage wrought by uncertainty and uncontrollability is social support. A circle of close friends and family, and a supportive management team at work, can be a particularly potent force in mitigating the damage of stress.

Equally effective in combating the effects of uncertainty and uncontrollability in the workplace is a policy of devolving control. In their pioneering book Healthy Work, mentioned in the previous chapter, Theorell and Karasek investigated a highly influential management model in which specialized workers mechanically execute plans handed down by upper management. Most jobs in companies adhering to this model had a high workload and low control; they also had a high incidence of stress-related illness. Theorell and Karasek asked whether illness in the workplace is the inevitable price we pay for higher profits. They concluded that it is not, that a healthy worker is a productive one. Moreover, a healthy worker is one with far lower medical costs, and these can add up to substantial savings both for the employing company and for the economy as a whole. Their research, and other studies like it, suggests that levels of workplace stress and worker health should become goals of management just as much as short-term profits. Theorell and Karasek cite the case of a Volvo car plant in Sweden that devolved control over many details of production to small groups of workers, and found that the incidence of stress-related illness dropped noticeably.

Middle management during crises often acts like those dominant monkeys that, when subjected to stress, take to bullying juniors. Senior management should therefore restrain middle managers from venting their frustration on traders (and salespeople), no matter how hard that is, no matter how deserving of termination they may be.

The 2002 Sarbanes–Oxley Act in the United States, designed to improve corporate governance and financial disclosure, encourages mandatory vacations during which there is to be no contact with the office. These vacations may have the inadvertent effect of breaking up physiological feedback loops and returning a risk-taker’s body to normal.

One economist who fully understood the challenges for policy of nonrational decision making was Keynes. He insightfully described how “animal spirits” drive investment and market sentiment, but he lacked any training in biology, so he never attempted to specify what exactly these animal spirits were. Nonetheless, as animal spirits bulked larger in his thinking, the less faith he had in the rate of interest as a tool for managing the economy. That is one reason he came to believe in fiscal policy, the state taking over the role of stabilizing an economy that can no longer do it on its own. Keynes harbored doubts about the ideal of a life guided by, and public policy directed at, rational choice. He once humorously hinted at these doubts when recounting a conversation he had with his friend Bertrand Russell, the arch-rationalist philosopher. Russell, he recalled, claimed that the problem with politics was that it is conducted irrationally and that the solution was to start conducting it rationally. Keynes dryly commented that conversations along these lines were really quite boring. And they are, still today. How, then, can we deal with irrational exuberance and pessimism? Can bank and fund managers and central bankers manage the biology of risk takers? Here we are off any map drawn by rational-choice theory. We inhabit a culture dominated by Platonic and Cartesian ideals according to which reason is the ultimate arbiter of our decisions and behavior. If we are indeed built ...

Alternatively, governments and central banks could change prices in the market, such as the rate of interest, and let rational economic agents reallocate their spending and investing dollars accordingly. Unfortunately, the policies following from rational choice theory have not been terribly successful in stabilizing the market, and the ideal of rational choice itself has prevented us from building up any skill in dealing with a human biology run rampant, either at an individual level or at the level of policy. And this challenge is not isolated to the financial markets, for it occurs elsewhere as well. David Owen, the senior British politician and neurologist mentioned above, has been studying this problem in the political world. During his lengthy career in the House of Commons and then the House of Lords, stretching from the 1960s to the present, Owen has observed many political leaders succumb to something very like irrational exuberance, and their resulting hubris often wreaked havoc on the country. Owen recognizes that this syndrome, acquired while exercising power, presents a conundrum for political theory: how do we protect the country from leaders who develop what amounts to a mental illness while holding office? Owen’s concerns echo those of central bankers who similarly face the problem of managing and containing the damage done by an unbalanced biology in the markets.

A woman will indeed experience fight-or-flight if faced by a grizzly bear, just as a man will; but Taylor thinks that a woman’s natural reaction to threat, at least within the social situations that are today our normal environment, is what she calls the “tend-and-befriend” reaction, an urge to affiliation. She reasons that if you have children to care for, tend-and-befriend makes more sense than launching into a fist fight or running away.

As for their long-term stress response, women on average have the same levels of cortisol as men, and these are equally volatile. But research has found that women’s stress response is triggered by slightly different events. Women are not as stressed by failures in competitive situations as are men; they are more stressed by social problems, with family and relationships. What all these endocrine differences between men and women add up to is the following: when it comes to making and losing money women may be less hormonally reactive than men. Their greater numbers among risk takers in the financial world could therefore help dampen the volatility.

What about the second-mentioned explanation, that men and women differ in their appetite for risk? There have been some studies conducted in behavioral finance that suggest that on computerized monetary choice tasks women are more risk averse than men. But here again, I am not entirely convinced, because other studies, of real investment behavior, show that women often outperform men over the long haul, and such outperformance is, according to formal finance theory, a sign of greater risk taking.

In an important paper called “Boys Will Be Boys,” two economists at the University of California, Brad Barber and Terrance Odean, analyzed the brokerage records of 35,000 personal investors over the period 1991–1997 and found that single women outperformed single men by 1.44 percent. A similar result was announced in 2009 by Chicago-based Hedge Fund Research, which found that over the previous nine years hedge funds run by women had significantly outperformed those run by men.

Barber and Odean traced the women’s outperformance to the fact that they traded their accounts less. Men on the other hand tended to overtrade their accounts, a behavior the authors take as a sign of overconfidence, a conviction on the part of the men that they can beat the market. The trouble with overtrading is that every time you buy and sell a security you have to pay the bid–offer s...

Ruminating about the role of testosterone today, he worries that the real challenge facing us is not so much how to incorporate women more fully into society but how to stop men from seceding from it. A chilling thought. Keynes entertained somewhat the same concern, and concluded that capitalism, rather than any of the other economic systems on offer during the 1930s, was the preferred antidote to our violent urges, quipping that it is better to terrorize your checkbook than your neighbor. So maybe it is better to have testosterone vented in the markets than elsewhere. I do not think that follows. We tend to get extreme behavior of the sort that gives testosterone a bad name when we isolate young males. This phenomenon can be observed in the animal world, and most vividly among elephants. In the absence of elders, young male elephants go into musth prematurely, a condition in which their testosterone levels surge forty to fifty times above baseline, and then they run amok, killing other animals and trampling villages. In South Africa, park rangers have found a solution to the problem: they have brought in an elder male elephant, and his presence has calmed the rogues.

There is another way in which the idealism–realism split between Plato and Aristotle showed itself, and that was in their political thought. Plato’s Republic has inspired countless philosophers and political leaders over the centuries, yet his ideas of the good life tended to force people into roles for which they were ill suited. Unearthly ideals, we have learned at great cost, too easily lead to social and political disasters. Equally, otherworldly ideals of economic rationality can too easily lead to the design of a marketplace fatally prone to financial crises. Aristotle’s realism, on the other hand, led him to recommend political institutions that accommodate actual human beings rather than idealized ones. Aristotle looked at the ways we are built, our biological details, and then judged policies and political institutions according to how well they suited our nature, how effectively they brought out the best in us and channeled what was dangerous in harmless directions. Today, through advances in neuroscience and physiology, we are rediscovering the unity of brain and body that Aristotle already understood. We should, I believe, take the next step and follow his template for conceiving a social science. With our now highly advanced understanding of human biology we are in a position to create a unified policy science, from molecule to market. If we were to do so we would find, as Aristotle did, that biology can provide us with the behavioral insights we need.