Just Finished Reading: The Hour Between Dog and Wolf – Risk-taking, Gut Feelings and the Biology of Boom and Bust by John Coates (FP: 2012)

Why are we plagued by periods of Boom and Bust? Why are economic bubbles created a why do they inevitably burst? Are depression’s, Great and otherwise, just a price we have to pay for growth and a vibrant stock market? Or is it a case, argued by some on the Left especially, that Capitalism itself is seriously flawed and full of contradictions which is the underlying cause of so many problems?

Only to an extent, argues the author of this very interesting exploration of markets as viewed from the trading floor. The other cause is much older, much deeper and even predates humanity itself. Keynes called it ‘animal spirits’ in an attempt to explain the often deeply irrational aspects of the market (populated by supposedly rational beings making rational decisions). To find out what the phenomena really was the author left to world of high finance for a university lab to study the science of Neurology. Here he believed they had discovered the explanation of the business cycle – human biology, specifically the hormones adrenalin, cortisol, dopamine, and testosterone. Developed over millions of years to cope with real danger and the strategy of fight or flight today they react to stock prices, interest rates and currency fluctuations in the bodies of the mostly male traders on stock exchange floors throughout the world. Allied to bonus pay-outs that reinforce high risk taking the natural hormone response to stress, anxiety and stress accelerate both the meteoric rise and fall of stock markets. When on the seemingly ever rising market gravy train risk is piled on risk until the whole edifice collapses followed by an equally irrational panic ‘fire sale’ burning all in its path until the tidal wave of selling subsides, stability momentarily returns before stocks start rising again before an equally predictable future crash – all driven by a toxic soup of hormones in our bodies designed ultimately to keep us alive.

But it wasn’t just an interesting theory. There’s lots of science here, some speculative but most based on well-known and well understood appreciation of how our bodies and the bodies of our ancestors operated. Not only drawing on real studies of traders themselves (including some undertaken by the authors and his colleagues) but back up by research into animal behaviour, brain scans, and evolutionary biology. What he proposed made a lot of sense and it was very interesting to look at what, on the face of it was a purely economic activity, from the point of view of human biochemistry. Novel just doesn’t cover it! It was at times honestly surreal but I did find myself looking at the issue – which initially seemed inexplicable – suddenly become very explicable indeed once the supposedly rational agent was shown the door and the hormone suffused actual person took their place. I have long been a vocal critic of the whole rational agent idea and this, I believe, throws that idea out once and for all. In conjunction with Behavioural Economics ideas like those portrayed in this book give a whole new gloss to the study of economics as it happens in reality rather in the world of perfect completion and perfect knowledge (to say nothing of value maximising rational agents). If you’ve ever thought that Economics wasn’t for you – that it was too divorced from reality, that it was too spreadsheet based or that it relied far too much on ideology to be of much use then this book might be for you. Once read you’ll never look at economics or boom and bust quite the same way again. Recommended.