Dr. John Coates is a former Wall Street derivatives trader turned neuroscientist. He uses his dual expertise to understand the way individuals contribute to market instability, studying the impact of biology on financial risk-taking. His new book, The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, investigates hormonal responses to stress situations on the trading floor. By sharing his observations, Coates questions the inherent assumptions of traditional economic theory. He casts doubt on the notion of finance as a purely rational art, where the human mind is the sole actor in a process from which biology is absent. Instead, he recommends that industry insiders begin to take into account the complementarity of mind and body.
You were a derivatives trader on Wall Street and you are now a research fellow in neuroscience. What made you shift your career?
I had a friend doing a PhD in neuroscience at Rockefeller University in Manhattan and I was splitting my time between the trading desk and her lab. I started picking up the basics in neuroscience and thought it could help explain irrational exuberance in the markets. When I went back to the University of Cambridge to research the biology of risk-taking, I retrained in neuroscience and endocrinology. Today, however, my research focuses more on physiology; most of my colleagues are in the Department of Medicine. You have previously focused on the impact of the endocrine system on risk-taking, in particular on how two hormones, testosterone and cortisol, play a fundamental role in behavior.
Can you tell us more about your findings?
Well, my colleagues and I have been looking at hormones; but more generally we are looking at the influence of the body on financial risk-taking. Economics assumes that financial risk-taking is a purely cognitive activity, a question of pure mind and rationality. In many subjects like economics and finance, we seem to have inherited a culture dominated by the notion of a mind-body split, which dates back to Plato. This notion runs deep and actually has an effect on research, but you cannot separate body and brain. The body-mind split is hard to believe in once you have taken large risks, as I did when I was a trader on Wall Street. At moments like that you realize the body is fully involved. Most of the time, our body and brain work together, not separately. That was a lightbulb moment for me. No one had actually looked at how the body participates in financial risk-taking, how this fusion of body and brain normally guides our risk-taking; or how it can, under some circumstances, destabilize risk preferences.
Why is it important to understand the biochemical processes in financial decision-making?
It can help us to understand the causes of financial market instability, something that has remained something of a mystery. Our data suggest that risk preferences shift systematically across the cycle, with the financial community taking too much risk in a bull market and too little in a bear market. Monetary policy has had very little success at countering this instability, possibly because price signals such as interest rates are feeble weapons against biology.
To read the full interview, subscribe or order a copy of The Global Journal.
Interview by Julie Mandoyan
(Photo © DR)