June 14, 2012

Jack Covert Selects: Jack Covert Selects - The Hour Between Dog and Wolf

By: 800-CEO-READ @ 1:57 PM – Filed under: Management & Workplace Culture

The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust by John Coates, The Penguin Press, 352 pages, $27.95, Hardcover, June 2012, ISBN 9781594203381

Many of today’s top graduates, the best engineers and scientists, mathematicians and physicists of the day, have been lured to Wall Street by the overwhelming amounts of money the big firms there are offering. One would assume that with all that talent and brain power, all the sophisticated risk analysis they’ve done and all the money that flows to Wall Street every day, that the world economy would be humming along. Instead, risk takers on Wall Street rode a series of bubbles into a false sense of security and invincibility, stoking hubris instead of humility when taking on great financial risk, and the world continues to sit on a precipice of financial collapse as a result. This is, of course, not the first time we’ve been here, but that didn’t stop it from happening again.

Joan Coates, a great mind that has moved from Wall Street to university—specifically Cambridge, to research the biology of risk—thinks that with the assistance of modern science, we can now explain why this destructive tendency occurs.

Recent research in physiology and neuroscience can, I believe, help us explain this ancient, delusional and tragic behavior. Human biology can today help us understand overconfidence and irrational exuberance, and it can contribute to a more scientific understanding of financial market instability.
And although this research is applicable to all aspects of human life, he focuses on the financial world for two reasons:
[F]irst, because finance is a world I know, having spent twelve years on Wall Street; second, and more important, because finance is the nerve center of the world economy. If athletes succumb to overconfidence, the lose a match, but if traders get carried away on a flood of hormones, global markets founder.
The Hour Between Dog and Wolf is, simply put, fascinating. It is a book on finance that explores consciousness and the subconscious, a book about markets and their “animal spirits” that calls on Kant to explore free will and what “lurks beneath our rational, conscious selves.” But it is first and foremost a book of modern science that works through those formerly philosophical unknowns to show us what is physically happening to our bodies, and how our intuition and conscious reality interact, when we make decisions and encounter risk. It ranges from fun phenomenon like the physiology of goose bumps to more serious problems like ulcers and heart disease.

The book explores “gut feelings” in detail, explaining what's happening physiologically when they occur, and demonstrates that trading skill (as opposed to luck) does actually exist and should be measured and compensated accordingly. In the end, Partnoy begins to illuminate “the invisible hand” of the market, showing that the hand belongs to us and that it’s up to us to decide how to play it.