The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust

by John Coates

Quick Summary

Former Wall Street trader turned Cambridge neuroscientist John Coates explores how hormones and physiology drive financial risk-taking. He shows that testosterone surges during winning streaks create irrational exuberance, while cortisol spikes during losing streaks cause pathological risk-aversion. The book explains the fight-or-flight response on the trading floor, the biology of gut feelings, and how the body's chemical feedback loops amplify market bubbles and crashes, arguing that financial markets cannot be understood through purely rational economic models.

Detailed Summary

John Coates's "The Hour Between Dog and Wolf" brings a unique perspective to financial markets: that of a former derivatives trader at Goldman Sachs and Deutsche Bank who returned to Cambridge University to study neuroscience and physiology. The book's title comes from the French expression for dusk -- the hour when a dog might become a wolf -- symbolizing the biological transformation that risk-taking produces in humans.

The book's central thesis is that financial risk-taking is a profoundly biological activity, not the purely intellectual exercise that economists assume. When traders take risk, their bodies prepare for physical action through the fight-or-flight response, flooding the bloodstream with hormones and neurochemicals that feed back into the brain and alter judgment, perception, and risk appetite.

Part I establishes the mind-body connection in financial markets. Coates describes a typical trading-floor scenario in vivid physiological detail, showing how an incoming piece of news triggers cascading biological responses -- accelerated heart rate, cortisol release, adrenaline surge, tunnel vision, heightened awareness -- that are identical to the response a soldier might experience under fire. He introduces the concept of "body-budget" thinking: the brain is not a disembodied computer but a biological organ whose calculations are deeply influenced by the body's physiological state.

Part II explores "gut thinking" -- the neuroscience of rapid, pre-conscious processing. Coates shows that much of our risk assessment occurs below the threshold of conscious awareness, through what Antonio Damasio calls somatic markers. Experienced traders develop "gut feelings" that are not mystical intuition but the integration of bodily signals that encode patterns learned through years of market exposure.

Part III, "Seasons of the Market," presents the hormone cycle that drives boom-bust dynamics. During a winning streak, testosterone levels rise, increasing confidence, risk appetite, and the threshold for fear. This creates a positive feedback loop: winning raises testosterone, which encourages more risk-taking, which (during a bubble) produces more winning. The result is the irrational exuberance phase. Conversely, during a losing streak, cortisol levels rise, promoting risk-aversion, pessimism, and withdrawal. This creates the irrational despondency phase. Both extremes are hormonally driven departures from rational decision-making.

Part IV discusses resilience -- the biological and psychological factors that allow some individuals to maintain equilibrium through volatile periods. Coates draws on stress research, sports science, and military training literature to identify the characteristics of physiologically resilient risk-takers.

The book concludes with policy implications: if financial markets are partially driven by biology, then regulatory frameworks that assume purely rational actors are fundamentally flawed. Coates suggests that greater diversity on trading floors (gender, age) might reduce the hormone-driven herding that amplifies bubbles and crashes.