Stock trading highs more primal than managed

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IN the aftermath of the 2008 stock-market collapse, it's no surprise that the bipolar behaviour of the financial markets should come under clinical observation.

The latest offering of Cambridge University mathematician John Coates puts Wall Street traders and the marketplace on a figurative analyst's couch -- to discover the cause of the highs and lows that so affect pension portfolios and stock prices.

Though it has the potential to be dry as dust, The Hour Between Dog and Wolf is actually an entertaining read. Coates dumbs down the science of his study so that it is easily accessible to the average reader.

Coates has the pedigree to watch over the wolves of Wall Street. His Cambridge work includes cognitive and behavioural neuroscience in the Judge Business School. He's written on traders and bankers of financial institutions before, in books that linked naturally occurring steroid levels to risk-taking and finger length to success levels.

He borrows his title from French author Jean Genet's final work, Prisoner of Love. The phrase puts to words the fear many have as night takes over, when dog and wolf appear no different, so both are to be feared.

Coates and his fellow scientists essentially open a trading desk on Wall Street and also monitor endocrine and the nervous systems of traders in London. Coates's hypothesis is that the extreme highs and lows of the markets may be driven by actual physiological changes impacting the trader, changes that cause the trader's risk preference to swing.

Of absolutely no comfort to the small investor is the fact that these changes and swings appear to be automatic rather than managed.

He aptly describes the nature of a typical trading floor, which is usually marked by long periods of relative inactivity followed by brief surges -- not unlike a war, he says. That swing between boredom and fear instantly activates the safety circuitry that has brought us to the top of the food chain -- flight or fight.

Coates explains how the beginning of a shift in the marketplace is felt by traders in the ceruleus, a region deep within the brain. The ceruleus "feels" a change or threat long before it emerges, whether in a car park, a football field or on the trading floor.

That realization of risk places the brain on high alert, so that our senses become hyper aware. Coates refers to athletes on a playing field who say they become so aware, so alert, that it seems as if they can pick out every voice in the stadium or every blade of grass.

Coates provides a play-by-play of the response to threat or opportunity on the trading floor, where the trader seems more like a hunter with spear in hand than a young man dressed in a suit sitting at a computer.

He gives a gripping account of all the switches that turn adrenaline flow from drip to torrent as the trader senses a market shift.

The downside of this book is the feeling of poor control it leaves the hapless small-time investor. You're not just fighting big institutional investors, you're up against a sharply dressed trader who's flashing back to his ancestor's days in a cave.

Jackie Shymanski is director of communications and public affairs at CancerCare Manitoba.

The Hour Between Dog and Wolf

Risk Taking, Gut Feelings

and the Biology of Boom and Bust

By John Coates

Random House, 288 pages, $30

Republished from the Winnipeg Free Press print edition May 19, 2012 J7