Has The Hour Between Dog and Wolf by John Coates been sitting on your reading list? Pick up the key ideas in the book with this quick summary.
You can learn a lot from a former Wall Street trader, from information about stock markets to clever trading tips. Perhaps, you’d be surprised to learn that through analyzing the behavior of traders on the stock-market, you would be able to see how your hormones actually influence your everyday life and through that, you can learn how to improve the way that you deal with stress.
Written by a neuroscientist and former trader, The Hour Between Dog and Wolf
aims to explain the bubbles and crashes of the stock market through examining the central role played by our physiology and biochemical processes. The key lessons of the book are not only relevant to making your fortune on the stock market but can affect all
areas of your life.
In this summary The Hour Between Dog and Wolf by John Coates, you’ll learn:
- how intuition comes from both the body and the brain;
- that our bodies perform actions before we even make the decision to;
- why men and women respond to stress differently; and
- how the risk of a market bubble and crash can be deduced by hiring more women and older men to trading floors.
The Hour Between Dog and Wolf Key Idea #1: Your decisions are based on your entire body, not just your brain.
How do you picture the connection between your brain and body? Many people think of their brains as very separate from their bodies, as if the brain is a kind of control center residing in their heads and steering the body, causing its every action.
If you fall into this category, then you’re in for a surprise: we actually think with our entire bodies, not just our brains.
Our thoughts and actions are controlled by hormones stemming from every different part of our bodies.
For example, Ghrelin is a hormone secreted by the cells that line the stomach when it’s empty. When this hormone is released, our brains understand that we’re hungry, and we search for something to eat.
On the contrary, though, we aren’t completely at the mercy of Ghrelin. If there’s a large enough reason not to eat (e.g., a religious fast, hunger strike or a diet), then you can effectively ignore Ghrelin’s signals. But then again, you can only ignore it up to a point. Over time, the hormone acts somewhat like a lobby group, and its signals become louder and nearly impossible to ignore.
This shows that certain bodily regions can influence the processes in your brain – in this case, the way the brain registers hunger. And this can be further demonstrated by looking at the way that the gut interacts with the brain.
When we get stressed, our brains tell our bodies that there is a threat, and therefore, our stomachs start to prepare for this. Upon the warning of this threat, the gut will stop digesting, in order to save energy for a fight or flight response. Stress, at its core, is processed by both body and brain.
It works the other way around too: if our stomachs are sensitive, they can actually influence our thinking. In fact, people with Crohn’s disease, an inflammatory bowel disease, are far more sensitive to emotional stimuli. If people with Crohn’s disease are exposed to emotive images, such as a distressed child, there is a higher chance that they will have an emotional response than a healthy person might.
The Hour Between Dog and Wolf Key Idea #2: We are massively influenced by testosterone, especially when it comes to taking risks.
Testosterone has a major influence on our behavior, so it’s considered to be one of the most powerful hormones.
When faced with a challenge, for example, an athletic competition, the body releases testosterone, which allows you to compete for longer periods of time. The release of testosterone creates a temporarily faster metabolism and quickens the rate of cell growth. It also increases our physical strength, lifts our mood, and heightens our cognitive performance.
Increased levels of testosterone, though, also increase the chances for us to take risks. In a competitive environment, such as the stock market trading floor, this risk-taking impulse can be dangerous.
When the author examined how testosterone could influence the skill and risk taking of stock market traders, he found that the hormone didn’t affect the person’s skill, as skills can only increase through experience. Instead, the testosterone increased the amount of risks traders took, when compared with individuals with lower testosterone levels.
Risk taking does often have benefits, but success from this can prompt the body to release even more testosterone. This loop, a process that can result in extremely reckless behavior, is known as The Winner Effect
Animals behave this way too. After a fight, the victorious male experiences a spike in testosterone, which sticks around for the next fight, while the loser’s testosterone levels fall, prompting him to avoid fights in the future.
After a while, the rising testosterone levels in the winner will transform him. The French even call this “the hour between dog and wolf,” which refers to the hour in the day where the light is so dim that it’s impossible to tell if a threat is near.
After the winner has gone through this transformation, he grows in confidence and ends up engaging in reckless behavior.
Because animals experience this transformation, the high testosterone levels can cause them to win a good number of fights, but they’ll also take more risks, and therefore, they’re also more likely to die young.
The Hour Between Dog and Wolf Key Idea #3: Our physiology is slow and works on its own, so our brains only anticipate movements, while our conscious decision making simply stands by.
Have you ever wondered how it’s possible to catch a fast-moving ball with so much speed and accuracy when there’s so little time to consciously process the situation? It’s due to the fact that our brains anticipate
such movements because human physiology doesn’t work fast enough to see what’s happening in real time.
The way the human eye is structured, we move through our physical world with a one-tenth of a second delay. This 100-millisecond lag between the event of the ball being thrown and our registering that movement causes the brain to anticipate where the ball will be in the air once it reaches us.
There was an experiment that showed this nicely, where participants were shown a screen displaying a circle, drawn in two bands of two different colors – blue on the outside, yellow on the inside. The yellow circle in the middle, however, would flash on and off within the blue circle.
The blue-and-yellow circle would then be moved around the screen. However, to the person perceiving this, it appears that the circles are not moving together, but that the blue circle is moving while the yellow one lagged behind.
Why? This happens due to the fact that the brain can anticipate how the blue circle might move, but not how the yellow circle will move. Therefore, this was a good way for us to understand how the brain anticipates the movement of objects, instead of perceiving them in real time.
Therefore, due to these automatic reactions, our consciousness appears to merely be a by-product of our actions.
In the 1970s, physiologist Benjamin Libet conducted an experiment where electrical activity in participants brains was measured while he instructed them to lift one of their fingers.
The region of the brain responsible for preparing
for the action of lifting a finger was active 300 milliseconds before
the region responsible for making the decision
to lift a finger was engaged.
The results of this study show that making a conscious decision comes after
our brain has already prepared for the action. The human consciousness acts much like a bystander, simply observing a decision already taken.
The Hour Between Dog and Wolf Key Idea #4: Through their automatic physical reactions, traders can learn to predict the market.
Many people can relate to the experience of knowing something, even if we can’t explain it, and instead, simply feel
that it is true. Because of this, some people think their intuition is actually a supernatural gift.
In reality, though, intuition is simply what happens when our bodies recognize patterns in the environment.
Recognizing patterns like this is especially crucial in the cutthroat world of the stock exchange, where traders have to be able to predict the ups and downs of the market.
Contrary to the Efficient Market Hypothesis, which says that markets are unpredictable, traders actually can
learn to predict the market.
The Efficient Market Hypothesis, a central principle in economics, argues that markets fluctuate as new information arises. Since news is, by definition, unpredictable, people who support the Efficient Market Hypothesis argue that the stock market must also be unpredictable.
However, assuming the Efficient Market Hypothesis was true, that would mean that traders couldn’t consistently make more money than the stock market makes itself.
The author tested the hypothesis by examining the Sharpe Ratio of experienced traders. The Sharpe Ratio is a measure for success in the stock market. He found it to be 2.5 times higher for experienced traders compared to less experienced traders. He was then able to use this to understand how these traders were making more money than the stock market was.
He was able to see, in the skilled traders he studied, that the Sharpe Ratio increased over the years, and therefore, was able to discern that the stock market can be learned .
traders themselves don’t have an explanation for how they beat the market, which is because they’re depending on their intuition, influenced by their automatic physical reactions – or Somatic Markers
Traders actually subconsciously learn the patterns of the stock market environment through the unconscious physical response that incoming new information triggers.
For example, a trader’s body might tense up in different ways when thinking about different available options. So, although the trader might not consciously have a recollection of these physical memories, he’ll get the feeling of a “hunch” and intuitively make the best decision.
The Hour Between Dog and Wolf Key Idea #5: Stock market traders should have strong cognitive skills and physical fitness in order to meet the demands of the market.
Many people on the trading floor are young and fit men (and even former athletes), even though most people consider working on the stock market an “office job.” Why? The most successful traders often have the qualities of high stamina, excellent concentration, and are able to make trades quickly.
Traders often engage in something called visuo-motor scanning while scanning the screens for even the smallest price anomaly. It can very much tire out the human brain to be engaged in this process for a long period of time, yet traders have to do it for hours on end.
An activity like this that requires such concentration also requires the traders to be physically fit; this means getting the right nutrients, enough sleep, and a range of other physiological factors.
Traders must be quick, too. If a good trade comes up, they have to make the decision to purchase it before another trader does, because if someone else gets there first, the price will rise and their returns will shrink.
Physical fitness gives traders a greater awareness of their bodies. They’ll likely be better at interpreting their bodies’ signals – or Somatic Markers – and will be able to better predict changes in the market and therefore have more reliable hunches.
In one study, researchers found that they could accurately measure people’s sensitivity to Somatic Markers with a “heartbeat awareness” test. Subjects were asked to listen to a repeating tone and report back whether or not the tone was in sync with their heartbeat.
The study found that people who were more physically fit were better at identifying this pattern than people who were less in shape, leading some researchers to suggest that possession of this skill should be a prerequisite for the recruitment of traders.
The Hour Between Dog and Wolf Key Idea #6: As the prices of stocks rise, traders can become addicted to the trade, and are more prone to taking more risks.
While traders are in the middle of a “bull market” – a market in which stock prices are rising – a lot of them gain so much confidence they think they can’t fail. While this seems like a great situation to find yourself in as a trader, it can have adverse consequences: addiction and greater risk-taking.
Risky trading can lead to addiction because it can increase levels of dopamine, the hormone associated with desire, in the same way gambling often does.
In a study, rats were given one drop of juice, causing their dopamine levels to rise. After a few repetitions of this action, the dopamine started to show rising levels even before
the rats were given the juice. This led researchers to come to the conclusion that the increase in dopamine was actually associated with longing for the next drop of juice.
A very similar reaction happens in drug addicts, and, as you may guess, stock traders. Risky trades cause an extreme rush of dopamine when they pay off, and traders want to experience that over and over again.
Dopamine also reacts with testosterone, which increases risk taking, which causing traders to be even more willing to take these risks.
A trader’s testosterone level increases when the trader is making a lot of money on a particular day, which leads them to experience the Winner Effect
. This boost in testosterone increases the dopamine levels even more, making every win feel even better than the last.
As they win even more repeatedly, their testosterone levels keep rising, leading to them making more risks on the trade floor. This can easily turn into a cycle, causing a market bubble to form when enough traders start to experience this type of wins.
The Hour Between Dog and Wolf Key Idea #7: Market crashes can cause a strong, physical reaction for traders, which makes it even harder to recover.
Big stock market crashes affect the whole world. Traders go through so much stress because of this that a crash makes it really difficult to recover the market.
During a crash, traders experience a strong physical reaction. Among other stress responses, the hormone cortisol is released, which affects the way the brain functions. In the short term, cortisol can give us the energy to escape a threatening situation, but in the long term, it becomes harmful.
Cortisol has a negative effect on memory. When cortisol has been released, it often causes traders to remember their losses more strongly than their wins, and this therefore lowers their testosterone levels, causing them to be more afraid to take risks.
Because cortisol inhibits the frontal lobe, it also affects rational thought. Traders become unable to think clearly when cortisol has been released, so they’re more prone to believe rumors about the market. This leads to them being even more avoidant to risk taking.
Additionally, the locus coeruleus
— the part of the brain that helps us choose which stimuli is the most important — starts firing incessantly. This makes it even harder to make good trades because traders can’t distinguish signals from other noise.
These physiological effects can cause traders to miss good trades due to their now-irrational behavior, therefore increasing the market’s volatility.
Stress during a crisis in the market gets even worst because traders start acting out towards each other.
According to Robert Sapolsky, a scientist who studies primates, stressed out dominant males often pick on weaker males.
The exact same thing happens on trading floors during a crisis. For example, oftentimes, middle managers will fire employees well before layoffs are actually announced, or – perhaps adding more stress – they’ll strongly hint
at impending changes in the staff, which leads to a general fear of losing one’s job.
These types of stressful moments can raise anxiety and make the stress response during the crisis even worse.
The Hour Between Dog and Wolf Key Idea #8: To help traders make less bad decisions, it can help if they not only toughen up, but also reduce their stress.
As we’ve seen, the natural stress response of the human body can lead people to make bad decisions. But, knowing this, might there be a way to prevent how stress can affect the physiology of our bodies, and therefore reduce the way it can impact decision making?
Although resilience is genetic, if someone repeatedly puts themself under moderate stress, it can help toughen them up.
For instance, in one study that involved young rats being handled by humans – a very stressful experience for the rats – it was shown that the rats exhibit fewer stress responses as adults, leading them to live up to 18 percent longer.
However, it’s important that the stressor is only moderate. Major stressors, such as separating the young rat from the mother, actually have the opposite effect.
Therefore, when traders are hired, candidates who have experienced some stress in their past may actually be better for the job — they’re likely to not be as easily stressed on the trading floor.
Physical exercise can also serve as another type of stressor, especially if it involves being exposed to cold weather. Exercise releases what are known as “growth factors,” which help our neurons to grow, therefore strengthening our brain against stress and aging.
One study found that rats who regularly swam in cold water responded quicker and more intensely to negative stimuli, showing that they had a better arousal response. Those same rats, when exposed to stressors later on, were tougher than rats who were not exposed to the cold.
Research has studied a similar effect in humans, which has lead them to believe that this is the reason people in Nordic countries use saunas followed by a cold shower.
Of course, even the toughest traders can experience mental fatigue when things get too stressful. However, if they can switch freely between tasks, this will lead to less stress and traders will thus make fewer mistakes.
Many work-related illnesses and mistakes are the result of employees not being given the power of choice in their work, and therefore, it’s hard to distinguish what they should pay attention to. However, if employees can voluntarily switch tasks throughout the day, they experience less fatigue throughout the day, and can even feel rejuvenated by the new tasks.
The Hour Between Dog and Wolf Key Idea #9: Creating a more diverse work environment on the trading floor could actually minimize the effects of testosterone on the market.
You might think it’s merely a cliche of Hollywood movies, but the reality is, trading floors actually are staffed mostly by young men.
Since young men have the highest testosterone levels of any population, their behavior in response to the hormone is also the most volatile.
A great solution to this problem would be to introduce more diversity on the trading floor, as this would have a calming effect on the market.
A good possible place to start is in hiring older men, as this would lessen the impact of testosterone on the market. In males, testosterone levels rise until they are in their mid-twenties, and then they fall gradually before they stabilize around the age of 50.
This means that older men are less susceptible to the effects of testosterone, which makes them less likely to act out on the trading floor.
Even though hiring older traders can actually help the floor overall, trading floors are often hostile toward older traders due to their slower reaction times and tendency to be more cautious (which the others interpret as fear).
However, famous investors like Warren Buffett or Benjamin Graham actually achieved their success later in life, so this caution and slower reaction time doesn’t necessarily decrease how successful someone could be.
Another good place to start is with hiring more female traders. Currently, women only make up around 5 percent of the trading floor’s population, but – like older men – they’re also less sensitive to the testosterone-induced market frenzies.
Women naturally have a very different biological makeup from men, and therefore possess only 10 to 20 percent of the testosterone levels we see in their male counterparts, making them far less prone to the hormone’s effect. For example, during the Winner Effect, women don’t experience the same spike in testosterone as men do.
Women also respond differently to stress than men do. While they can experience the fight-or-flight response in moments of physical danger, women are more likely to show the “tend and befriend” response. Originally, “tend and befriend” referred to the fact that females prioritize protecting their offspring and therefore seek out a group (by “befriending”) for mutual protection. If we translate this idea to the workplace, it can be understood than women respond to stress by showing someone extra care.
The Hour Between Dog and Wolf Key Idea #10: Fun can actually add to our stress, whereas a feeling of being in control can reduce it.
Think back to the last time you were particularly stressed. How would you have responded to the opportunity to take an exotic vacation? More than likely, you would’ve seen this as perfect timing, thinking that you need the time off to relax.
However, you’d be wrong to respond this way thinking it would help. When we’re stressed, novelty actually adds
to our physiological stress load, and can even make us ill.
In one study, psychologists asked a group of men about events that changed their lives such as divorce, death, weddings, and childbirths. The researchers found that all
such events, even the positive ones, can lead to an increased risk of illness and mortality.
Why is this? The researchers believe that any novelty that changes a person’s living circumstances adds to their physiological load, and therefore, can lead to illness.
Due to this, the novelty of taking a vacation if you’re under stress could actually increase the stress you’re feeling, even though you might not feel its effects right away.
Instead, the thing we need most in stressful situations is actually familiarity, rather than novelty. However, that doesn’t take away the fact that sometimes we can’t avoid novelty. In such situations, the best way to reduce your stress is to make sure you feel in control.
In one study that looked at patients in pain, it was found that the patients suffer even more if they have to question when they’ll receive their next pain medication, or if they’re unable to administer it themselves.
When patients are able to have some degree of control over their pain medication, it was found that they actually required less medication in general. An explanation for this is that this feeling of control actually reduces stress, and therefore, lessens the pain the patient is feeling.
In conclusion, when patients gain a little control over an otherwise difficult situation, they feel less pain and actually need less medication.
In Review: The Hour Between Dog and Wolf Book Summary
The key message in this book:
Traders in the stock market don’t necessarily behave rationally. Rather, their behavior is largely influenced by the trader’s physiology, including hormone levels and the body’s muscle memory. During both market bubbles and crashes, hormones such as testosterone and dopamine can have a great impact on traders’ behavior, and therefore affect the market. Diversifying the gender and ages of people on trading floors would balance this hormonal effect and therefore stabilize the market.
Suggested further reading: Antifragile by Nassim Nicholas Taleb
explores why some things seem to improve if they are placed in environments of volatility and unpredictability. The book suggests that this quality has been vital for the progress of human civilization since ancient times. Nassim Nicholas Taleb takes a critical look at modern society how it attempts to make life feel easier by interfering in systems such as the economy.