Book Discussion: The Hour Between Dog and Wolf by Dr. Coates

You only say that because Mrs T is watching lol.

I'm on for The Eagles. Dunno' how I feel about no Glenn Frey though. TBH, I think I'd rather go see Don Henley on his own tour (or even Joe Walsh).

imo psychology is a huge issue when trading serious money.
Some people have great psychology for it but most others not so. I personally found it hard and even though had great understanding and strategy my psyche would prevent me from taking trades, holding trades and aborting positions that had changed.
Strategy helps and bad psyche can often mean need to fix strategy somewhat. So I do agree with that but psychology can also be whats preventing the strategy from playing out.

You can overcome it imo. But you need
to work on it like
anything else. Good thread. Much needed discussion for serious traders.

[quote=Cools81;11878995]imo psychology is a huge issue when trading serious money. Some people have great psychology for it but most others not so. I personally found it hard and even though had great understanding and strategy my psyche would prevent me from taking trades, holding trades and aborting positions that had changed. Strategy helps and bad psyche can often mean need to fix strategy somewhat. So I do agree with that but psychology can also be whats preventing the strategy from playing out. You can overcome it imo. But you need to work on it like anything else....[/quote]

Welcome aboard.

I think one of the main issues at the heart of trading is trust, or to be more precise, lack of trust. Do you really trust that the move you have seen happen over-and-over again will hold out over time. Or do you just know that the moment you go live, that same flawless move will go completely the opposite way and wipe you out?

It's not for this book and we will continue on till the end - however as a continuation on from this subject, the book ''Fooled By Randomness'' may be where we could go next.

Good day all,

Today, I am sharing notes and thoughts from Chapter 1 "THE BIOLOGY OF A MARKET BUBBLE".

Highlighted thoughts,

1. "Hunger, thirst, pain, oxygen debt, sodium hunger and the sensations of heat and cold, for example, have accordingly been called “homeostatic emotions.” They are called emotions because they are signals from the body that convey more than mere information—they also carry a motivation to do something."
2. "As testosterone levels rise, confidence and risk taking segue into overconfidence and reckless behavior."
3. "The research I encountered on steroid hormones thus suggested to me the following hypothesis: testosterone, as predicted by the winner effect, is likely to rise in a bull market, increase risk taking and exaggerate the rally, morphing it into a bubble. Cortisol, on the other hand, is likely to rise in a bear market, make traders dramatically and perhaps irrationally risk averse and exaggerate the sell-off, morphing it into a crash. Steroid hormones building up in the bodies of traders and investors may thus shift risk preferences systematically across the business cycle, destabilizing it."
4. "If, however, you view your brain and body and behavior with a robust appreciation of the fact that you are built to move, and if you let that simple fact sink in, then I am willing to bet you will never see yourself in quite the same way again. You will come to understand why you feel so many of the things you do, why your reactions are often so fast as to leave conscious thought behind, why you rely on gut feelings, why it is that during the most powerful moments of your life—satisfying moments of flow, of insight, of love, of risk taking, and traumatic moments of fear, anger and stress—you lose any awareness of a split between mind and body, and they merge as one. Seeing yourself as an inseparable unity of body and brain may involve a shift in your self-understanding, but it is, I believe, a truly liberating one."

Notes about women being less prone to market hype,

1. "As I say, the overconfident behavior I describe is one most traders will recognize and most have experienced at one point or another in their careers. I should add, however, that in addition to the changed behavior among traders, another remarkable fact struck me during the dot.com years—that women were relatively immune to the frenzy surrounding Internet and high-tech stocks. In fact most of the women I knew, both on Wall Street and off, were quite cynical about the excitement, and as a result were often dismissed as “not getting it,” or worse, resented as perennial killjoys."
2. "The role of testosterone could also explain why women seemed relatively unaffected by the bubble, for they have about 10–20 percent of the testosterone levels of men."

Takeaways:

1. People are controlled by hormones, whether they realize it or not. It is especially evident in the times of imminent crisis or excitement (fear, anger, bull market, love-making, etc.).
2. Furthermore, one's body controls one's brain to a bigger extent than many realize. Coates ends the chapter on a unifying note, where both the brain and body play important and equal parts.
3. About women's question, I'll let women speak. Perhaps, this is where Claudia, who has linked one article already, and other females can shed more light for us.

In the next chapter, Coates takes a closer look at the dialogue between the brain and body.

'' ...testosterone, as predicted by the winner effect, is likely to rise in a bull market, increase risk taking and exaggerate the rally, morphing it into a bubble. Cortisol, on the other hand, is likely to rise in a bear market, make traders dramatically and perhaps irrationally risk averse and exaggerate the sell-off, morphing it into a crash. ''

More appropriate for the stock market, I feel, as most there (except the big gorillas) will be buying stock and wanting it to increase in value, hence the rush of seeing same increase in value.

When we trade fx, then we are equally excited by the short as the long trade. I see and feel no difference whichever I am in.

Great suggestion! We may do just that and read that book next.

Good morning, all!

Chapter 2 "Thinking with your body" is up for a discussion. It is much shorter and less filled with statistical data, which makes it easy to read.

Quotes:

1. "Indeed, if we take a closer look at the dialogue between body and brain we will come to appreciate just how crucially the body contributes to our decision making, and especially to our risk taking, even in the financial markets."
2. "We do not regard information as a computer would, dispassionately; we react to it physically."
3. "The point is this, and I cannot emphasize it enough: when faced by situations of novelty, uncertainty, opportunity or threat, you feel the things you do because of changes taking place in your body as it prepares for movement."
4. "Through the research surveyed here, from anatomy, physiology and neuroscience, we have today come to see the body as an éminence grise, standing behind the brain, effectively applying pressure at just the right point, at just the right time, to help us prepare for movement. Scientists, by small steps, are thus patiently stitching closed an ancient wound opened up between mind and body. By doing so they have helped us understand how body and brain cooperate at crucial moments in our lives, like the taking of risks, including, most certainly, financial risks."

Thoughts:

1. Should a trader recognize that his or her body has a voice and allow it to contribute to the decision-making process?
2. The story about an ocean animal that injects its brain once settle down in a rich feeding ground is impressive and thought-provoking. It definitely highlights the point that we need brains so that we can learn new movements and it is an on-going process.
3. Looks like the human brain has a powerful ally - a body. Who knows what these two can do together.

Next chapter is from the second part "Gut Thinking" and is titled "The Speed of Thought". It takes an example from a trading desk.

Claudia, can you shed some more light for us. Let's take notes from the 2nd chapter,

Notes about women being less prone to market hype,

1. "As I say, the overconfident behavior I describe is one most traders will recognize and most have experienced at one point or another in their careers. I should add, however, that in addition to the changed behavior among traders, another remarkable fact struck me during the dot.com years—that women were relatively immune to the frenzy surrounding Internet and high-tech stocks. In fact most of the women I knew, both on Wall Street and off, were quite cynical about the excitement, and as a result were often dismissed as “not getting it,” or worse, resented as perennial killjoys."
2. "The role of testosterone could also explain why women seemed relatively unaffected by the bubble, for they have about 10–20 percent of the testosterone levels of men."

1. Do you agree or disagree with his position?
2. Do you find it easier for you to make rational decisions in trading compared to others, men in particular?
3. Any advice you would give to those struggling with the "frenzy"?

Thanks in advance!

Hello to all,

It's Saturday. The market is closed so there is time to talk about other things. Here are my notes from chapter 3 "THE SPEED OF THOUGHT".

Quotes:

1. "We are now going to look at Martin’s trade much as an athlete’s coach would, as a physical performance. We saw in the last chapter that our brain evolved to coordinate physical movements, and these by the very nature of the world we lived in had to be fast. If our actions had to be fast, so too did our thinking. As a result we came to rely on what are called preattentive processing, automatic motor responses and gut feelings. These processes travel a lot faster than conscious rationality and help us coordinate thought and movement when time is short. We will look at some extraordinary research that demonstrates just how unaware we can be of what is really going on in our brains when we make decisions and take risks."
2. "Thinking, one could say, is something we do only when we are no good at an activity."
3. "To sum up, we humans have been equipped over our long evolutionary training period with a large bag of tricks designed to increase our speed of reactions. In the foregoing discussion I have rummaged in this bag and pulled out only a few of our amazing gadgets. But demonstrating how they work should be enough, I hope, to show just how reliant we are on these quick responses for survival in the wild and in war, for success in sports and for buying back a large block of bonds sold to DuPont."
4. "We may be on autopilot for much of the day, but that does not mean we cannot take responsibility for our actions."
5. "... we do not in fact have free will; what we have is free won’t."

Thoughts to ponder:

1. In this chapter, Coates finally takes an example from trading, where he compares it to sports activities. He does that to conclude that our brain is most engaged when we are learning something new. Other than that, our brain puts us on an autopilot mode.
2. Knowing this, one can more efficiently use one's brain, allowing times for learning and trusting brain's autopilot.
3. The author hints at his findings that he will share in the book. Will be interesting to read what they are.

The next chapter is all about Gut Feelings.

Later!

Good day to you!

Here to share notes from chapter four "Gut Feelings". This chapter is all about guts and intuition, as opposed to the previous chapter which was all about the brain. Highlighted more than usual because this is a topic of interest to me.

Notes:

1. "When pressed for a decision Martin therefore needs help in drawing up a shortlist of options and their likely consequences. It is in this process that his gut feelings are brought in to streamline his thinking."
2. "Kahneman and Klein first agreed that intuition is the recognition of patterns. When we develop a skill at some game or activity we build up a memory bank of patterns we have lived through, and of which we have seen the consequences. Later, when encountering a new situation, we rapidly scroll through our files looking for a stored pattern that most closely resembles the new one. Chess grandmasters, for example, are said to store up to ten thousand board configurations which they access for clues on what to do next. Intuition is thus nothing more mysterious than recognition."
3. " 'Remember this rule,' advises Kahneman: 'Intuition cannot be trusted in the absence of stable regularities in the environment.'"
4. "The question of whether the resulting decisions are trustworthy is not one that can be answered once and for all—“Yes, always trust your hunches,” or “No, work out a decision tree.” Its answer will depend on your training. We should not be asking if we should trust our intuitions; we should be asking how we can train ourselves to possess a skill that can be relied on."
5. " ... the brain affects the body, or the other way around, but the flow of causation is one-way: brain affects body, for example, and that is the end of the story. But the situation is very different in cases of body–brain feedback. In feedback a thought affects the body, and the changes taking place in the body then feed back on the brain, changing the way it thinks."
6. "We tend to think that we cry because we are sad, run from a bear because we are scared, but James argued that the true course of events runs the other way around. We are sad because we are crying, scared because we are running away. More precisely, the course of events unfolds as follows: we perceive a bear; our brain triggers automatic escape behavior, such as running; and this physiological change is then reported back to our brain and shows up in our consciousness as a feeling of fear. Some scientists have even argued that the feeling itself plays a very small role in an emotional event, tagging along as mere observer of action already taken. It is, as the neuroscientist Joe LeDoux suggests, no more than “icing on the cake.”"
7. "The speed of our muscular reactions in general and the almost incredible speeds of facial expressions in particular have led many researchers to venture what has been called the “facial feedback theory of emotions,” according to which the purpose of facial expressions is not so much to express feelings as to generate them. This new theory echoes that of James: we act first, feel later."
8. "In short, neural activity in our head can affect our digestion; neural activity in our gut can affect our mood and thoughts."
9. "... the question we are trying to answer: why are we built with these feedback loops? What purpose do these emotions and moods serve? Are the feelings they carry largely superfluous? Not likely. What is more likely is that these feelings help slant our attention, memory and cognitive operations so that they synchronize with our bodies. When we face an attack, for example, we want our body to be tensed and ready, but we also want our brain to think aggressively. When we want to start a family, on the other hand, we want body and brain to be in sync in a gentler, more loving manner. During important moments in our lives like these we do not want our tissues multitasking; we do not want, say, a body gearing up for battle but a mind thinking amorous thoughts. Feedback ensures that our tissues do not work at cross purposes. Feedback, carried by nervous system and hormones alike, unifies body and brain at the most important points in our lives. And at these moments—of euphoria, of flow, of love, of fear, of fight—body and brain merge."
10. "To trade well you have to tear your attention away—and it can take a great deal of discipline—from the obvious piece of analysis lying under your nose, and listen to these faint voices."
11. "LeDoux, puzzling over his own and Wilson’s observations, concluded that “people normally do all sorts of things for reasons they are not consciously aware (because the behavior is produced by brain systems that operate unconsciously) and that one of the main jobs of consciousness is to keep our life tied together into a coherent story, a self-concept.” In other words, we make things up."
12. "This too is a pretty standard finding on a trading floor: it is frequently said that if you want to know what traders think of the market, do not ask their opinions, look at what trades they put on."
13. "That study had found that when morning levels of testosterone in male traders were higher than average, the traders went on to make an above-average profit later that day. The reporter for The Economist suggested that traders could test themselves first thing in the morning, and if their biochemistry was not right, they should just go home."

Noteworthy:

1. Intuition is not about pure gut feelings, there got to be previous successful experience and "stable regularities in the environment".
2. This is a great piece of advice, "if you want to know what traders think of the market, do not ask their opinions, look at what trades they put on."
3. What do you make of the idea of measuring one's level of testosterone in the mornings in order to predict one's success? Those who want to find something to measure or who wants to predict success should be happy.

With the next chapter, we are starting the third part of the book "Seasons of the Market".

Later!

Morning!

Highlights and thoughts from chapter five "THE THRILL OF THE SEARCH".

 

1. "Information warns us of danger, prepares us for action, helps us survive. And it enables us to perform that most magical of all tricks—predicting the future."
2. "According to Shannon, the amount of information contained in a signal is proportional to the amount of novelty—or, put another way, the amount of uncertainty—in it. That may seem counterintuitive. Uncertainty seems the antithesis of information. But what Shannon meant was this: real information should tell us something we do not already know; it should therefore be unpredictable."
3. "... the fundamental discovery of Shannon’s information theory: information is synonymous with unpredictability, with novelty. When receiving pure information we are in a state of maximum uncertainty about what comes next."
4. "Troxler fading shows that our senses do not work at all like that. Indeed, it is probably closer to the truth to say that we, like the frog, are built to ignore the world unless something of importance happens."
5. "The need to distinguish trivial from important information is nowhere more pressing than in the financial markets."
6. "A human brain trying to map all the information in the financial markets would soon collapse with exhaustion."
7. "Two of the scientists conducting this groundbreaking research, Kent Berridge and Terry Robinson, concluded that dopamine stimulates the wanting of juice rather than the liking of it."
8. "A preference for effortful consumption makes sense from an evolutionary point of view, for both animals and humans.If you are programming an animal to survive, you should make it enjoy more than just eating and drinking and having sex, which would encourage it to develop into nothing more than a couch potato or a louche hedonist. You should make it love the activities that lead to the discovery of food, water and sex. And that is what dopamine does: it makes us want to repeat certain actions, be they hunting, going on dates or for that matter searching the screens for a trading opportunity."
9. "Indeed, recent research has found that an enriched environment is such an attractive alternative to drugs that animals addicted to cocaine, once returned to an enriched environment, will actually kick their habit."
10. "The orienting response is an involuntary wait-and-see reaction, and while in its grip our heart and lungs slow almost to a stop."
11. "During the orienting response both the fight-or-flight and the rest-and-digest nervous systems are activated at the same time. When this happens our body is fully prepared for a quick sprint or a fight to the finish, but it is being restrained by what Stephen Porges, of the University of Illinois at Chicago, calls the vagal brake. At this point your body resembles a drag-racing car at the starting line: it locks its front brakes but guns its engine and spins its back tires, burning rubber and shooting out flames, until at the green light the driver merely releases the brake, and the car rockets down the track. The principle here is that the car accelerates far faster by releasing the brake on an already revving engine than it does by stepping on the gas and initiating acceleration. Much the same thing seems to happen in your body. The vagus, a powerful and fast-acting nerve, restrains the fight-or-flight response, allowing blood pressure and circulating levels of adrenaline to build up, and then releases its brake when the news comes out, instantaneously bringing heart and lungs to full speed."

Food for thought:

1. The human brain is built to filter information. Trying to accept all information may blow it up. Only when something important happens, we tend to pay attention.
2. Humans are also built in a way that when we receive information that we deem important, we try to predict the future.

I'd forgotten the drag racing analogy and it's perfect for describing what's going on!

Good day! Here are thoughts and comments from chapter six "THE FUEL OF EXUBERANCE".

 

1. "So, all hype aside, what exactly is testosterone? Testosterone is commonly thought of as a male sex hormone, but it is found in women as well. There are profound differences, however, between the sexes. Men produce it in their testes and to a lesser extent their adrenal glands, and women in their ovaries and adrenals. Importantly, men produce about ten times the amount of testosterone as women, and therefore display more pronounced effects. In fact, so broad and powerful are these effects that it is this molecule, almost on its own, that creates a male."
2. "Testosterone thus prepares an animal for a competition, but it is what happens next that drives the winner effect. After the fight is over the winning animal emerges with even higher levels of testosterone, the loser with lower levels. These hormonal signals, it has been argued, make sense: if you have just lost a fight, you had better retire into the bush and nurse your wounds; while if you have won you can expect an increased number of challenges to your newly elevated status in the social hierarchy."
3. "In short, levels of testosterone can rise and fall for extended periods of time, even years."
4. "What we found was that testosterone did not improve their Sharpe Ratios, but it did increase the risk they took. We retain the belief that testosterone also has effects on the traders’ visuo-motor scanning and speed of reactions, although we will not be able to test this in the field. What our trading-floor studies did highlight, however, was that testosterone, a signal from the body, was having a large effect on the risk taking of traders, rising with above-average profits and increasing risk taking. These experiments thus provided good preliminary evidence that the winner effect does in fact occur in the financial markets."
5. "In ancient Rome, when a general had achieved a great victory he was awarded a Triumph, a ceremonial parade through the center of the city. But the ancients were clever; to prevent the general’s hubris from ruining him, they placed in his chariot a slave whose job it was to whisper in the general’s ear a reminder that he was not a god. “Remember this,” the slave warned, “you are mortal.” To bring home the point he would hold in the general’s line of vision a human skull, a memento mori, a vivid sign of his inevitable fate. But alas no such memento mori exists within the banks, so very little tethers a winning trader to earthly standards of prudence."

Comments,

1. What do men here think about the idea of measuring one's level of testosterone each morning before engaging the market? On one hand, should something be measured, it might as well be testosterone. Remember those days when you just "didn't feel like it" but made yourself to trade only to lose at the end of the day?
2. How is the idea of a slave to whisper in a general's ear reminder to come down to earth? Do we need such a voice when we are "crushing it"? On the other hand, what kind of voice do we need when the opposite is true?

Later!