The Hour Between Dog and Wolf: Risk-taking, Gut Feelings and the Biology of Boom and Bust. John Coates

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СКАЧАТЬ 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.

      WHAT LIES BENEATH

      In fact, so fast are our reactions that consciousness is frequently left out of the loop. Given that sobering fact, we have to ask: what role does consciousness play in our lives? We experience our consciousness as something residing in our heads, peering out through our eyes much as a driver peers through a windscreen, so we tend to believe that our brain interacts with our body just as a person interacts with a car, choosing the direction and speed and issuing commands to a passive and mechanical device. But this belief does not stand up to scientific scrutiny. As George Loewenstein, an economist at Yale, points out, ‘There is little evidence beyond fallible introspection supporting the standard assumption of complete volitional control of behavior.’ And he is right, for the stats on reaction times tell us otherwise: we are for the most part on autopilot.

      The news gets even worse for the Platonists among us. In the 1970s, Benjamin Libet, a physiologist at the University of California, conducted a famous series of experiments that has tormented many a scientist and philosopher. These experiments were simplicity itself. Libet wired up a group of participants with what are called EEG leads, small monitors attached to the scalp which record the electrical activity in the brain, and then asked them to make a decision to do something, like lift a finger. What he found was that the participants’ brains were preparing the action 300 milliseconds before they actually made the decision to lift their finger. In other words, their conscious decision to move came almost one third of a second after their brain had initiated the movement.

      Consciousness, these experiments suggested, is merely a bystander observing a decision already taken, almost like watching ourselves on video. Scientists and philosophers have proposed many interpretations of these findings, one of which is that the role of consciousness may not be so much to choose and initiate actions, but rather to observe decisions made and veto them, if need be, before they are put into effect, much as we do when we practise self-control by stifling inappropriate emotional or instinctive urges. (We may be on autopilot for much of the day, but that does not mean we cannot take responsibility for our actions.) Libet’s experiments, suggesting as they do that consciousness is largely an override mechanism, led one particularly witty commentator, the Indian neuroscientist V.S. Ramachandran, to conclude that we do not in fact have free will; what we have is free won’t.

      It seems that consciousness is a small tip of a large iceberg. But what exactly lies below it? What lurks beneath our rational, conscious selves? The eighteenth-century German philosopher Immanuel Kant proposed a particularly intriguing answer to this question: we do not know what is down there. Kant believed that our consciousness – that is, our experience of a unified and understandable world, and of a continuing person experiencing this world – is possible only because our mind constructs this unified experience. If our mind did not organise our sensations the world would be a whirling, blooming confusion. But the mind does: it provides organising constructs, such as space and time, so that we experience a continuing world, just as it does another construct, that of cause and effect, which ties succeeding events together into a coherent story. Kant thought all these unifying constructs applied only to the veil of sensations, and not to the entities creating or lying behind the sensations. These objects we can never know. Inaccessible to rational analysis, forever mysterious to science, these hidden beings can be groped at and suggestively discerned only through art and religion. And it is in this dark world that the soul belongs, putting it too beyond the ken of rationality and beyond the domain of cause and effect. It was upon this argument that Kant rested his belief in free will.

      Kant’s philosophy left a deep imprint on German thought. Freud, inspired by Kant’s vision, argued that below the façade of our rational selves, deep in our subconscious, there boils a devil’s cauldron of envy and sexual perversion and patricidal tendencies which warps our judgement. Nietzsche too found beneath our delusions of rationality and morality a dark urge for power and dominance. Modern neuroscience, however, has lifted the lid off this hitherto mystifying brain and found something far more valuable than the entities proposed by nineteenth-century German philosophy – a meticulously engineered control mechanism. More valuable because it has been precisely calibrated over millennia to keep us alive in a brutal and fast-moving world. And we can thank our lucky stars for it, otherwise we would long ago have been battered to extinction. Lifting the lid of our brain does not reveal the nether world of Kant’s unsayable, nor the volcanic will of Nietzsche’s superman, nor yet the hellish subterranean den of Freud’s subconscious. It reveals something that is a lot closer to the inner workings of a BMW.

      FAST TIMES ON THE TRADING FLOOR

      Let us now return to the financial world, and consider the importance of fast reactions to the success and survival of risk-takers. Traders like Martin frequently face high-speed challenges which demand an equally fast response. The challenges may not demand quite the same speed of reactions as fielding at silly point, but traders nonetheless regularly face time constraints, and when they do their decision-making and trade execution must bypass conscious rationality and draw instead on automatic reactions. This is especially true when markets begin to move fast, as they might in a frantic bull market. Then Martin is obliged to sell bonds to clients or risk alienating the sales force, and must scramble to buy them on the broker screens or from other clients before losing money. At times like this trading is much like a game of snap, and the fastest person wins.

      This simple point carries unexpected implications for economics. It is not often appreciated that financial decision-making is a lot more than a purely cognitive activity. It is also a physical activity, and demands certain physical traits. Traders with a high IQ and insight into the value of stocks and bonds may be worth listening to, but if they do not have an appetite for risk then they will not act on their views and will suffer the fate of Cassandra, who could predict the future but could not affect its course. And even if they have a good call on the market and a healthy appetite for risk, yet are shackled with slow reactions, they will remain one step behind the market, and will not survive on the trading desk – or anywhere else in the financial world, for that matter.

      Treasury traders, like flow traders more generally (a flow trader is one who trades with clients, handles the flows coming off the sales desks), therefore require a battery of traits: they need a high enough IQ and sufficient education to understand basic economics; a hearty appetite for risk; and a driving ambition. But they also need the physical build. They must be able to engage in extended periods, hours at a time, of what is called visuo-motor scanning, i.e. scrutinising the screens for price anomalies between say the ten-year and the seven-year Treasury bond, or between the bond and currency markets. Such scanning requires concentration and stamina, and not everyone can do it, just as not everyone can run a four-minute mile. And once a price discrepancy has been identified, or a high bid spotted during a sell-off, a trader must move quickly to trade on these prices before anyone else. Not surprisingly, most flow-trading desks, be they ones trading Treasury or corporate or mortgage-backed bonds, usually employ one or two former athletes, a World Cup skier, say, or a college tennis star.

      The physical nature of trading is even more apparent on other types of floors. On the floor of a stock exchange or the bond and commodity pits at the Chicago Board of Trade, a trader’s job can resemble a day spent in a wrestling ring. Hundreds of traders stand together, jostling each other and vying for attention when trying to trade with each other, something they do with an arcane system of hand signals. When markets are moving fast and a trader needs the attention of someone on the other side of the pit, then height, strength and speed are of paramount importance in executing a trade, as is the willingness to elbow a competitor in the face. Needless to say, there are not a lot of women in the financial mosh pits.

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