The Hour Between Dog and Wolf

Coates traded derivatives at Goldman Sachs and Deutsche Bank before returning to Cambridge to study neuroscience and endocrinology, and this book presents his research on the physiology of financial risk-taking.

His central finding comes from studies he conducted on a London trading floor, measuring traders' hormone levels against their performance. He reports that testosterone rose on days when traders made money and that raised morning testosterone predicted higher profit that day, which he attributes to the winner effect observed in animals, where winning raises testosterone and increases the propensity to take risk and win again. His argument is that this produces a feedback loop in which a sustained run of gains raises risk appetite physiologically, which is what turns a bull market into a bubble. In the reverse condition, sustained losses raise cortisol, which he reports rose sharply with market volatility, and which produces risk aversion, selective attention to threat and eventually the physiological symptoms of chronic stress.

His wider argument is that the mind-body separation assumed in economics and finance is wrong, that judgement is a physiological process, and that risk-taking is regulated by systems that evolved for physical challenge and are being applied to financial ones.

The sample sizes in the trading floor studies are small and the field of behavioural endocrinology has produced mixed replication results. The general argument that physiological state affects risk-taking is well supported; the specific hormonal mechanisms should be treated as provisional.