Between Dog and Wolf

Review :

The unique title is taken from a French since the Middle Ages have called "L'heure entre chien et loup" and refers to the moments after sunset when the sky darkens and vision becomes ambiguous, making it difficult to distinguish between dogs and wolves, friends and foe. John Coates has brilliantly interpreted this unique title that it is this moment that we human being irrational and euphoric that makes us become appetite for risk and making a bad decision.

In fact, the appetite for risk-taking is so universal that anyone who involved in sports, runs for political office, fights in a war or being an entrepreneur. But the book he wrote only focus on financial risk-taking, and do so for good reason. First, because finance world is a world where John came from and having spent 12 years on Wall Street is a good place for him to do the research and collect numerous of empirical data with his own personal experiment in financial trading. Second, he describes finance is the nerve center of the world economy. If athlete succumbs to overconfidence, they lose a match, but if traders get carried away on a flood of hormones, the global market fluctuated. (It is easier to comprehend the book for people like me who have no knowledge background of any science or biology.)

In one important respect, he describes that 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, it carries with us for months, even years after our bets have settled, an inner biological storm. But during the average win or loss in markets can change us, Jekyll-and-Hyde-like, beyond all recognition. On the winning streak, we become overconfidence, euphoric, what the ancient Greeks called hubris and nemesis, and our appetite for risk increases so much that we puffed up with self-importance and feel indestructible. On the other hands, during the losing streak, we struggle with fear, dwelling in the bad moment over and over again, so that stress hormone linger in our brains, prompting us to be risk aversion, even depression for months or even years.

And the point I want to make is this: the overconfidence and hubris that traders experience during a bubble or a winning streak just does not feel as if it is driven by a rational assessment of opportunities, nor by greed-it feels as if it is driven by a chemical in our body.

Hormone plays a central role in our body. The maintenance of vital signs, like blood pressure, body temperature, glucose levels, etc., with the needed for our continued health. Most other internal chemical operates in our body preconsciously, in other words without our being aware of them. In the book, the author argues that the statement about biology and the financial markets may sound strange to the people who are teaching economics. Usually, people perception about the financial markets and the assessment of financial risk as a purely intellectual affair that requires a lot of acute and precise calculation of assets returns, probabilities, and strategic planning - carried on for the most part rationally. But he argues that recent advances in science proven that we humans do a lot more than just thinking about it. We sometimes rely more on our "Gut Feeling" more than the conscious mind. Thinking, one could say, is something we do only when we are no good at an activity. We are for the most part on autopilot during our daily tasks.

This tacit knowledge is shared between body and mind. 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, rather do not consciously know, what they mean.

The author explains the most likely reason for our beliefs about the mind, the brain, and the behavior have been indoctrinated by a powerful philosophical idea we inherited from the Western culture almost 2,500 years ago-that of a categorical divide between mind and body. It originated from the philosopher Pythagoras, who needed the idea of an immortal soul for his doctrine of reincarnation, but the idea of a mind-body split was cast in its most durable form by Plato, who claimed that within our decaying flesh there a spark of divinity, this being eternal and rational soul. The idea was subsequently taken up by St. Paul and become as Christian dogma. Later known as the mind-body problem; and physicists such as René Descartes's dualism for his famous quote: I think; therefore I am. In other words, we choose our course of behavior after thinking it through-and guided by a rational mind. According to this school of thought, we are walking computers who can calculate the rewards of each course of action open to us at any given moment, and weight these rewards by the probability of their occurrence.

I remembered that when I read The Story of Philosophy by Will Durant. He says that the epistemology has kidnapped the modern philosophy. People during this modern era with so much of abundant resources of knowledge and science yet can't be able solves the problem of knowledge we humans are facing right now. Maybe there is a limit of human knowledge that we can't even understand the species of ourselves. But the recent discovery of behavioral economics by Daniel Kahneman and Amos Tversky have succeeded in building up a more realistic picture of how we behave when dealing with money. (For more information, please read his best selling book. Thinking Fast & Slow as I couldn't be able to interpret the idea of the book within this limited paragraph) Daniel Kahneman, for one, has conducted research in the physiology of attention and arousal and has recently pointed out that we think with our body. In fact, it may be more scientifically accurate, although semantically difficult, to stop speaking in terms of brain and body at all, as if they were separable, and to speak instead of a whole-person to respond to events.

Recalled that the Hormones play a central role in our body and how it affects us in rational judgment and decision making. There is, in fact, a connection between preconscious decisions and the body, because it is gut feeling that allows us to rapidly assess whether a pattern and a considered choice will most likely lead to a pleasant or nasty outcome, whether we like or dislike, welcome or fear it. For instance, he describes that the Dopamine that our body produces prompted us to try things we had not tried before. It surges most powerfully when we perform a novel physical activity that leads to unexpected reward. It drives us to push beyond established routines. Other than that, the reason that drives the overconfidence traders in the financial market to overestimate their ability to take graver risk is the Steroid Hormone that produces by our body when the profits come in drastically. The author also describes that, when our body is placed entirely on hormones, there is some evidence that the nucleus accumbens, the thrilling center of the brain, outgrows the more rational prefrontal cortex of our brain. The euphoria, overconfidence and heightened appetite for risk that grip traders during bull market may result from a phenomenon known in biology as the "winner effect" that an animal winning a fight or a competition for turf was more likely to win its next fight. For this is the reason why so many successful traders or entrepreneur bragged about their success story, the winners experienced a self-reinforcing upward spiral of testosterone.

Nevertheless, the book is written in a very easy comprehend and interesting narration of story about traders in Wall Street. It's well written with a lot of meticulous research and by far the best scientific book that explains the human biology and psychology about risk taking and decision making. It is highly recommended for general readers who are involved in business, finance, or any other industry that requires decision making.


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