Best Quotes From The Hour Between Dog and Wolf By John Coates:
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When you take risks, you are reminded in the most insistent manner that you have a body. For risk by its very nature threatens to hurt you. A driver speeding along a winding road, a surfer riding a monster wave as it crests over a coral reef, a mountain climber continuing his ascent despite an approaching blizzard, a soldier sprinting across no man’s land – each of these people faces a high chance of injury, even death. And that very possibility sharpens the mind and calls forth an overwhelming biological reaction known as the ‘fight-or-flight’ response. In fact, so sensitive is your body to the taking of risk that you can be caught up in this visceral turmoil when death poses no immediate threat. Anyone who plays a sport or watches from the stands knows that even when it is ‘just a game,’ risk engages our entire being.
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In one important respect, financial risk carries even graver consequences than brief physical risk. A change in income or social rank tends to linger, so when we take risks in the financial markets we carry with us for months, even years after our bets have settled, an inner biological storm. We are not built to handle such long-term disturbances to our biochemistry. Our defense reactions were designed to switch on in an emergency and then switch off after a matter of minutes or hours, a few days at the most. But an above-average win or loss in the markets, or an ongoing series of wins or losses, can change us, Jekyll-and-Hyde-like, beyond all recognition.
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On a winning streak we can become euphoric, and our appetite for risk expands so much that we turn manic, foolhardy and puffed up with self-importance. On a losing streak we struggle with fear, reliving the bad moments over and over, so that stress hormones linger in our brains, promoting a pathological risk aversion, even depression, and circulate in our blood, contributing to recurrent viral infections, high blood pressure, abdominal fat build-up and gastric ulcers. Financial risk taking is as much a biological activity, with as many medical consequences, as facing down a grizzly bear.
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Greed certainly can and does cause investors to run with their profits too long. By itself, though, the account misses something important about bubbles like the dot-com era and perhaps the Roaring Twenties – that investors naively and fervently believe they are buying into the future. Cynicism and cunning are not on display. Furthermore, as a bull market starts to validate investors’ beliefs, the profits they make translate into a lot more than mere greed: they bring on powerful feelings of euphoria and omnipotence. It is at this point that traders and investors feel the bonds of terrestrial life slip from their shoulders and they begin to flex their muscles like a newborn superhero. Assessment of risk is replaced by judgments of certainty – they just know what is going to happen: extreme sports seem like child’s play, sex becomes a competitive activity. They even walk differently: more erect, more purposeful, their very bearing carrying a hint of danger: ‘don’t mess with me,’ their bodies seem to say. ‘I can handle anything.’
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When traders enjoy an extended winning streak they experience a high that is powerfully narcotic. This feeling, as overwhelming as passionate desire or wall-banging anger, is very difficult to control. Any trader knows the feeling, and we all fear its consequences. Under its influence we tend to feel invincible, and to put on such stupid trades, in such large size, that we end up losing more money on them than we made on the winning streak that kindled this feeling of omnipotence in the first place. It has to be understood that traders on a roll are traders under the influence of a drug that has the power to transform them into different people.
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Decisions are decisions to do something, so our thoughts come freighted with physical implications. They are accompanied by a rapid shift in our motor, metabolic and cardiovascular systems as these prepare for the movements that may ensue. Thinking about the options open to us at any given moment, scrolling through the possibilities, triggers a rapid series of somatic shifts. You can often see this in a person’s face as they think – eyes widening or squinting, pupils dilating, skin flushing or blanching, facial expressions as labile and fleeting as the weather. All thoughts involving choice of action involve a kaleidoscopic shift from one bodily state to another. Choice is a whole body experience.
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When reading of the outbreak of war, for example, or watching stock prices crash, the information provokes a strong bodily response: you inhale a quick lungful of air, your stomach knots and muscles tense, your face flushes, you feel the thump, thump of a heart gearing up for action, and a thin sheen of sweat creeps across your skin. We are all so familiar with these physical effects that we take them for granted and lose sight of their significance. For the fact that information, mere letters on a page or prices on a screen, can provoke a strong bodily reaction, can even, should it create uncertainty and stress, make us physically ill, tells us something about the way we are built. We do not regard information as a computer would, dispassionately; we react to it physically. Our body and brain rev up and down together.
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It’s not often appreciated that financial decision making is a lot more than a purely cognitive activity. It is also a physical activity, and demands certain physical traits. Traders with a high IQ and insight into the value of stocks and bonds may be worth listening to, but if they do not have an appetite for risk then they will not act on their views and will suffer the fate of Cassandra, who could predict the future but could not affect its course. And even if they have a good call on the market and a healthy appetite for risk, yet are shackled with slow reactions, they will remain one step behind the market, and will not survive on the trading desk – or anywhere else in the financial world, for that matter.
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When we develop a skill at some game or activity we build up a memory bank of patterns we have lived through, and of which we have seen the consequences. Later, when encountering a new situation, we rapidly scroll through our files looking for a stored pattern that mostly closely resembles the new one. Chess grandmasters, for example, are said to store up to ten thousand board configurations which they access for clues on what to do next. Intuition is thus nothing more mysterious than recognition.
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On any Wall Street trading floor you will find high-IQ, Ivy League-educated stars who cannot make any money at all, for all their convincing analyses; while across the aisle sits a trader with an undistinguished degree from an unknown university, who cannot keep up with the latest analytics, but who consistently prints money, to the bafflement and irritation of his seemingly more gifted colleagues. It is possible, though odd to contemplate, that the better judgment of the money-making trader may owe something to his or her ability to produce bodily signals, and equally to listen to them. We tend to think – we want to think – that decisions are a matter of cognition, of mind alone, pure reason…But good judgment may be a trait as physical as kicking a football.
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Disturbingly, a group of psychologists at Florida State, also looking at glucose levels in the brain, found that during taxing mental (as well as physical) activities our glucose reserves become depleted, and this reduces our capacity for self-control…Muscles, which draw a small amount of glucose when at rest, come to monopolize available resources during physical activity. The preferential treatment of muscles during a fight, or when playing a sport, for that matter, and the rationing of glucose to the brain regions responsible for self-control, might explain why fights so easily run out of control (hockey seems especially prone). Perhaps the same could be said of our self-control when we are working long hours at the office – we tend to snap more easily – or trying to stick to a diet, since the draining of glucose also drains us of resolve.
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A human brain trying to map all the information in the financial markets would soon collapse with exhaustion. Few professions, with the exception perhaps of air-traffic control or the military during time of war, compare with finance for the amount of information that must be sifted and processed in real time. But skilled traders and investors can do it. They can separate the signal from the noise, and feel in their bodies when the chaos on the screens can be safely ignored and when it cries a warning that should be heeded. Good traders do not just process information, they feel it. There are few phenomena in finance more remarkable, even mysterious, than this close linkage between market and body.
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Gambling, with its unexpected rewards, can also become a dopamine-driven addiction. Plugging coins into a slot machine hour after hour may look like the epitome of boredom, but when those three fruits line up unexpectedly and you hear that waterfall of coins, large quantities of dopamine are released into your brain, leaving you with a craving for more. And if gambling can be addictive, why not trading? 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 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.
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In the financial world, testosterone feedback loops, once they start, can cause traders to pass through the early stages of thrill and excitement, and end up convinced of their own infallibility. As these cycles rise to their euphoric high point, one finds traders, most of whom are young males, with impaired judgment, doing dangerously silly things. Following the pattern of the winner effect, traders experience a rise in testosterone when their trades make money, which increases their confidence and appetite for risk, so that in the next round of trading they put on even larger trades. If they win again, as they are likely to during a rising market, their profits will increase their testosterone once more, until at some point confidence becomes overconfidence, trading positions grow to a dangerous size and the risk-reward profiles of the trades start to stack the odds against them. But no matter; in their overconfident state, traders are convinced they will win anyway. As is management. When a trader makes more and more money, managers expand his risk limits apace. As a result traders are walking time bombs, and banks invariably light the fuse, dangling before them huge risk limits and bonus payments that have exceeded $100 million. No wonder the traders responsible for bank-crippling losses frequently turn out to be the stars of yesterday. Banking is an odd world.
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A bull market, like a river in spate, carries almost all before it; and the few people on the floor who do not buy into the frenzy start to feel like outsiders. The atmosphere can be compared to that of an exciting party, bubbling with possibility and animated conversation, but when you listen to the talk you find you cannot keep up, or get a word in, or even see where the interest lies in the things being said; and then it finally dawns on you: you and a few others at the party are the only ones not coked to the gills. That is what it feels like in a bank during a bubble. The few people left unaffected by the narcotics whisper in coffee rooms and after hours about the insanity that could blow up their bank; but the rest of the crowd are beyond reach. No amount of statistics, no history of price-earning ratios, no reasonable chat can bring their faraway look down to earth. To them, the money being made holds out the promise of too many things only dreamed of: a penthouse on the Upper East Side, a private jet, even political clout…all this is right there for the taking. Such people are caught firmly in the delusional phase of the winner effect.
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Of the conditions affecting traders, a particularly unfortunate one is known as ‘learned helplessness,’ a state in which a person loses all faith in his ability to control his own fate. It has been found that animals exposed repeatedly to uncontrollable stressors may pathetically fail to leave the cage in which the experiment was conducted if the door is left open. Traders, after weeks and months of losses and volatility, may similarly give up, slumping in their chairs and failing to respond to profit opportunities they would only recently have leaped on. In fact there is some evidence suggesting that people like traders might be especially prone to this sort of collapse. Banks and hedge funds commonly select traders for their tough, risk-taking, optimistic attitude. Optimism is generally a valuable trait in a person, especially a trader, for it leads them to welcome risk, and to thrive on it. But not always. Not if they are exposed to long-lasting and unpredictable stressors. 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.
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What stressors could contribute to toughening in humans? Research on toughening regimes is still in its infancy, but a few types of stressors 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 brain 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.
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It is too early in this research to recommend any particular toughening regime as a way for risk takers in the financial world and elsewhere to build up resilience to the stress that inevitably accompanies their jobs. However, I think financial institutions should take seriously the fact that a trader’s ability to handle risk involves a lot more than a knowledge of probability, macroeconomics and formal finance. Traders need to be trained so they can recognize and handle the physiological changes resulting from their gains and losses, and from market volatility. These training regimes will have to be designed in such a way that they access the primitive brain, not just the rational cortex. Since the body profoundly influences subcortical regions of the brain, the new training programs may turn out to involve a lot more physical exercises than they do at present. Banks and hedge funds could potentially learn from the programs of top-class athletes, for they are the people with the most experience of controlling their hormones and emotions in the interests of optimizing performance.
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Sometimes scientific discoveries do not herald a terrifying new world, but merely reveal a tacit knowledge we have always possessed but have never been able to articulate. This tacit knowledge is shared between body and brain. Most of it, like homeostatic regulation, remains inaccessible to consciousness; some of it, like gut feelings, can be brought to the fringes of awareness; and some, like fatigue and stress, can be brought to full consciousness but are often misunderstood. We are in the strange position of creatures who on the one hand generate bodily messages intended to maintain health and happiness or prepare us for movement, but on the other sometimes do not know, or rather do not consciously know, what they mean. Where body and preconscious brain meet conscious brain we resemble in our split being two peoples meeting on their mutual border and each trying to communicate through a language the other only dimly comprehends. Fortunately, we are now learning to decipher these signals. Through biology we are figuring out why we are receiving these messages and how to answer them.
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On a personal level, the blending of biology into our self-understanding could lead to more of Aristotle’s recognition moments, and could help us develop a much-needed skill at interpreting and controlling our exuberance, fatigue, anxiety, and stress. Written on the Temple of Delphi was the Maxim Know Thyself! and today that increasingly means know your biochemistry. Doing so does not turn out to be a dehumanizing experience at all. It is a liberating one.
Trading is Much More Than a Purely Intellectual Activity – It’s a Full Body Experience:
The overarching theme of The Hour Between Dog and Wolf by John Coates is that risk taking has an impact on our entire physiology – not just our brain. Most people tend to think trading is purely an intellectual activity, but it’s actually much more than that.
Simply having a well-informed idea or plan isn’t good enough to be consistently profitable. That idea/plan also has to be executed properly in terms of timing and risk management, while dealing with two complex, dynamic systems – your body and the market.
A deep level of self-awareness, as well as market understanding, is what many market participants lack – so it’s no surprise that the trading success rate is less than 10%. Great traders have a level of personal and market depth that the masses simply don’t.
I’ve done quite a bit of research on trading psychology and peak performance (by reading books and taking courses), which has allowed me to learn the benefits of things like mindfulness meditation – and I’ve developed a daily practice that I routinely stick to.
But I’ve also developed a daily routine of physical exercise. Before reading this book, I probably wouldn’t have been able to clearly articulate why I think it helps my trading so much. Now I deeply understand the connections between body, mind, and risk.
In fact – for the last year or so – I’ve chosen to skip trading for the day if I miss either one of my meditation or exercise routines – they’re that important to my overall process and performance (increasing focus, reducing stress, and a number of other benefits).
Learn More in the Trading Success Framework Course
Written by Matt Thomas (@MattThomasTP)
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- Where to Start Day Trading – Best Resources For Beginners
- Why is Day Trading So Hard – The Realities of Day Trading
- Top 25 Quotes From Peak By Anders Ericsson and Robert Pool
