• By John Coates
• Harper Collins
• RRP $34.99
For New Zealand readers in particular, this is scary book. But reading this book is risk worth taking. John Coates once worked on Wall Street trading derivatives for investment bankers Goldman Sachs, Merrill Lynch and finally Deutsche Bank.
Derivative traders are, more often than not, high IQ individuals. It’s not surprising therefore that Coates is now senior research fellow in neuroscience and finance at the University of Cambridge.
His interest in what he calls “the biological side of the financial markets” dates back to the 1990s. His thesis is that two steroid hormones – testosterone and cortisol – rather than cool hard logic and an abundance of research, influence the activities of money merchants and risk takers when they are full tilt working bull and bear markets. It’s all about the upper and downer physiology of risk.
Testosterone, “the molecule of irrational exuberance”, is, according to the author’s research, released into the body during moments of competition, risk-taking and triumph. It induces what is called the “winner effect”. I don’t have enough words available here to describe the detail of Coates’ discoveries, suffice to say that biology can equally produce depressing market moods in bad times.
Before you write this off as new age neuroscience, one of the world’s most thoughtful economists, John Maynard Keynes, apparently understood the challenges non-rational decision-making could pose in both markets and in politics.
According to Coates, Keynes described how “animal spirits” drove sentiment but because he lacked training in biology he never attempted to explain these.
However, he always harboured doubts about the ideal of life guided by, and public policy directed at, rational thought.
And the plot thickens. The challenges identified by Coates’ revelations are not confined to financial markets. According to senior British politician and neurologist David Owen they exist equally in the political world. Owen reckons political leaders often succumb to “something like very irrational exuberance”, and their “resulting hubris often wreaks havoc” on countries.
The problems caused by an excess of male hormone in powerful places can be somewhat mitigated by deploying more women and older men – they have very different biologies.
There is, according to Coates, little evidence that age impairs investor judgement or the ability to take risks.
This is compelling read for number of very sound, scientific and self-evident reasons. That Prime Minister John Key is former Merrill Lynch foreign exchange trader simply adds to its relevance for Kiwis.
