How risk taking transforms us, body and mind.

By: John Coates.

Published: 2012

Read: 2019

Summary:

Complex interactions and feedback mechanisms between the body and the brain evolved to maintain health and prepare us for movement. Especially in situations that require fast (motor) response, many of these interactions take place “pre-consciously” and the conscious brain is a mere observer of behavior.

This book explores the biology of how the body and brain work together to prepare the body for action in challenging situations, specifically where it involves taking risks and handling uncertainty (in financial markets). What mechanisms evolved pre-consciously (gut feelings) and consciously to produce a helpful response (dealing productively with novel challenges in the environment) and where do these mechanisms become counter-productive (the chronic stress response of seeing novelty as a threat).

Certain hormones and amines seem to have a disproportionate impact on the biology of risk-taking and they are examined more closely, including testosterone (irrational exuberance), cortisol (irrational pessimism) and dopamine (desire for risk, novelty seeking behavior).

On an individual level, (the balance and mix of) these molecules help determine your ability to handle novelty and your mental resilience when faced with potentially stress inducing situations: view novelty as a positive challenge or as a negative threat. Similar to physical toughness, mental resilience can be trained through repeated short exposure to stressors (physical, thermal).

On a collective level, these molecules combine to amplify both bull markets (the testosterone “winner effect” feedback loops among traders and investors ) and bear markets (the chronic stress response of cortisol and associated increases in collective pessimism and risk aversion). More diversity (older men, women) could perhaps soften the destructive impact of (young male) molecules on market bubbles.

Worth Reading:

A book that keeps the science simple and its arguments clear by focusing on only a handful of the more prominent processes and molecules involved in the brain and body biology of risk-taking. The excursions to the trading floor are helpful and convincing real-life illustrations of biology at work in a high stakes risk-taking environment.

Some of its conclusions may be overly simplified (testosterone + cortisol = bubble economy), but demonstrate an even broader point: “simple” biological processes inside individuals create and affect the complex world we experience and live in collectively.

Key Takeaways:

• We are not built to handle long-term disturbances of our bio-chemistry.
• If you do not need to move, you do not need a brain.
• Conscious brain:
  • Conscious thought is something we do when we are not good at an activity.
  • Consciousness is mostly a bystander (free won’t rather than freewill).
• Pre-conscious brain and gut feelings:
  • Perception => preconscious body messages => action / behavior => conscious brain feelings (emotions).
    • Preconscious body feedback helps to narrow down and prioritize information.
    • Emotions in the brain arise as short-term conscious signals to “do something”.
    • Gut feelings work best when we can easily recognize stable patterns (low novelty, no need for adjustments).
• Winner effect: winners emerge with higher levels of testosterone, helping them win yet again.
• Dopamine and information: novelty is good (but addictive).
  • Information: things we do not already know (novelty, uncertainty).
    • Data in a message that can’t be predicted.
  • Most messages in life are predictable and contain a lot of noise.
    • Data that can be compressed out of a message without impairing its meaning.
  • We evolved to pay attention to information.
    • Predictable events: no need to adjust our actions / intuitions.
    • Novelty: need to adjust our actions / intuitions.
  • Dopamine fuels desire for information and unexpected rewards: risk.
    • Dopamine is the compensation we receive for valuable effort.
    • It rewards us for novel physical actions that lead to unexpected reward.
    • Pushes us beyond established routines to try new search patterns (optimism).
    • Curiosity itself, the need to know, can become a form of addiction.
    • We develop a preference for effortful consumption.
    • We don’t want to be fed, we want to hunt.
• Cortisol and chronic stress: novelty is bad.
  • Novelty and uncertainty can also signal a threat and elicit a stress response.
  • Short-term, moderate stress exposure triggers focus heightened awareness.
  • Long-term, chronic stress response impairs cognitive functioning.
    • Thinking becomes more emotional, less factual (pessimistic, risk aversion).
• Mental resilience = handling novelty as a positive challenge, not a threat.
  • Nature: balance of anabolic (testosterone) and catabolic hormones (cortisol), neurotransmitter profile, vagal tone (vagus nerve ability to reduce stress response).
  • Nurture: exposure to productive short-term stressors (exercise, cold), limitation of unnecessary stressors (uncertainty, lack of control).

Key Concepts

The brain and the body.

• The assessment of (financial) risk is typically thought of as a purely intellectual affair (brain).
  • Rational calculation of returns, probabilities, etc.
• But when we take risk, we do a lot more than think about it.
  • When needed, the body switches on a network of physiological responses (body).
• The whole person response: the inseparable unity of brain and body.
  • Brain triggers the body, body’s reaction feeds back on the brain, biasing its thinking.
• Typically, body and brain work together well.
  • Defense reactions developed to switch on and off in emergency quickly.
  • Provide fast reactions needed for successful risk taking.
• But sometimes chemical surges can overwhelm, especially in the long run.
  • We are not built to handle long-term disturbances of our bio-chemistry.
• Understand how the brain and body cooperate in risk-taking.
  • The human biology, body and brain, of over-confidence, exuberance, etc.
• Specifically, how the biology of risk-taking affects the financial markets.
  • Interaction with regulatory and compensation infrastructure of financial markets.
  • Impact on larger economic phenomena (bull and bear markets, bubbles and crashes).

The brain evolved to control a more sophisticated body.

• Initial evolution of brains => support movement.
  • Brains evolved to plan, control and execute action.
    • Sensations, memories, cognitive abilities.
  • If you do not need to move, you do not need a brain.
• Evolution of larger brains => better movement.
  • Mostly driven by expansion of the cerebellum.
    • Hindbrain plays a major part in motor control.
  • Allowing for more subtle physical movement, more dense connections with the body.
• Better movement => higher demand for energy and coordination.
  • Brain has to coordinate motor, metabolic and cardiovascular systems to support movement.
    • Increase in amount of bodily signals processed by the brain.
  • More advanced homeostatic circuitry.
    • Sense organs pointing inwards providing information about body temperature, chemical gradients, etc.
    • Travel back to the brain through spinal cord or vagus nerve (gut, pancreas, heart and lungs).
    • Information is integrated into a unified body experience by the brain.
• As a result, human brains have relatively large:
  • Cerebellum => refined motor skills.
  • Amygdala, hypothalamus => more control of homeostasis.
  • Neocortex => forward planning, etc.
  • Insula => unique awareness of overall state of the body.
• Thinking => physical implications.
  • Thoughts involving a choice of actions trigger changes in the body.
  • The body makes these changes to prepare it for the appropriate movement.
    • Fight, flight, running, relief, etc.
  • Happens quickly, sometimes subconsciously.

 The speed of thought.

• Our brain has to be fast to coordinate physical movements.
• But, conscious processes are slow …
  • Slow process of taking in information, combining and processing, chemical and electrical signals, making a decision, issuing a motor command, etc.
• .. and we don’t see the world “live”:
  • To avoid needless drain of resources, we selectively and predictively experience.
• So, the brain performs ad hoc adjustments to speed up our understanding of the world …
  • Grouping information, relying on hearing versus seeing, etc.
• … or cuts out consciousness altogether: pre-attentive processing.
  • Automatic motor responses and gut feelings.
    • Example: blindsight, an ancient visual system in the brain that operates subconsciously.
  • Faster than conscious rationality.
  • Coordinate thought and movement when time is short.
• In the process, motor control is passed down toward lower brain regions.
  • Skilled anticipation, habits, automatic responses.
  • Cycle of: that unconscious incompetence, conscious incompetence, conscious competence, unconscious competence.
• Thinking is something we do when we are not good at an activity.
  • We are for the most part on autopilot.
• Consciousness may be merely a bystander.
  • Observing a decision already taken.
  • May not choose and initiate actions.
  • But rather observe decisions made and veto them before they are put into effect.
    • “Free won’t” rather than “freewill”.

 Hormones affect and coordinate body, brain and behavior.

• Hormones help regulate bodily functions and behavior
  • Produced by glands (or organs).
  • Carried by the blood from one tissue to another.
• Provoke emotions and provides pressure for behavior.
  • Emotions: signals from the body to “do something”.
• Can affect almost every function of our body and brain.
  • Elevated during situations that require cooperation (fight, flight, etc.)
• Release process:
  • Hypothalamus sends signal to a gland to produce a hormone.
  • Hormones are released, affecting the body and the brain.
  • Hypothalamus senses hormones and sends signal to stop hormone production.
• Testosterone: hormone of irrational exuberance.
  • Prevalent during moments of risk taking.
  • Increases blood’s capacity to carry oxygen, lean-muscle mass, confidence, risk appetite.
  • Winner effect:
    • “Winners” emerge with higher levels of testosterone, helping them win yet again.
    • As testosterone rises, confidence and risk-taking segue into over-confidence and reckless behavior.
  • Likely to rise in a bull market, exaggerate risk-taking, bubble.
• Cortisol: hormone of irrational pessimism.
  • Cortisol prevalent in long-term stress response (injury or threat).
    • Works in tandem with adrenaline.
      • Adrenaline acts fast (seconds – minutes).
    • Stops metabolically expensive functions (digestion, reproduction, etc.)
    • Starts breakdown of energy stores to release glucose.
    • Short-term: arousal and sharpened attention.
    • Long-term: anxiety, selective recall, risk aversion.
  • Likely to rise in a bear market, exaggerate the sell-off, crash.

Gut feelings: pre-conscious sensation and behavior.

• Gut feelings involve the brain as well as the body.
  • Perception => preconscious messages => behavior => conscious feelings (emotion).
• Following perception, preconscious brain receives messages from the body.
  • Homeostatic and emotional feedback, somatic markers.
  • Helps narrow down amount of information, options and consequences.
• Messages are carried from the body through various pathways.
  • Muscular nervous system.
    • Fast, prime for action.
  • Visceral nervous system.
    • Slower (fight/flight, rest/digest), provides immediate support to muscles.
  • Hormonal system.
    • Slowest, steroids prepare the body for longer term challenges.
• Body actions trigger conscious feelings: emotions or moods.
  • Emotion: fleeting, new valuable information.
  • Mood: long-term attitude.
• Act first, feel later.
  • Conscious brains have surprisingly little grasp of what drives decisions, behavior.
  • In order to keep a coherent self-concept together, we make things up…
• Body-brain interactions help align and unify.
  • Requires the ability to listen carefully to feedback from the body.
  • Helps direct attention, memory and cognitive operations.
    • Produces coherent behavior.
• Can we trust intuitive behavior?
  • On the one hand, often an efficient adaptation to real-life problems.
  • On the other, warped by biases.
• Works best where we can easily recognize patterns.
  • We build up a memory bank of patterns.
  • Regular environment, repeating patterns.
  • Frequent, clear feedback (learning).
• May be beneficial to monitor and measure somatic markers.
  • Markers may be weak or people may have low sensitivity to somatic cues.
  • Measurement may improve our visceral, interoceptive awareness.
• Literal gut feelings: brain in the head and a brain in the gut.
  • Gut is controlled by an independent nervous system, the enteric nervous system.
  • Vagus nerve connects the two “brains”.
    • Main nerve in the rest/digest system that runs from brain stem to abdomen.
    • Sends messages back and forth.
  • Two brains affect each other.
    • Brain affects digestion; gut affects moods and thoughts.

 Dopamine: drives risk taking, addiction to curiosity.

• Information tells us something we do not already know.
  • Information is synonymous with novelty, uncertainty, unpredictability.
  • = data in a message that can’t be predicted.
    • Surprise, discrepancy.
• Most messages in everyday life are, however, predictable.
  • Contain a lot of noise.
  • = data that can be compressed out of a message without impairing its meaning.
• Sensory apparatus attuned to pay attention exclusively to information.
  • Ignores predictable events (no need to adjust our actions).
  • Orients rapidly towards novel ones (need to adjust our actions).
• Information sharpens awareness, focuses attention.
  • Release of noradrenaline.
    • Alters the sensitivity of neurons in the brain (fire more easily, rapidly).
    • Prepares the body for action.
• Information processing:
  • The right amount = curiosity.
    • Too much: anxiety and stress, not enough: boring.
  • Separate the significant from the trivial.
    • • Through pattern recognition, matching and emotional assessment.
• Receiving information is rewarding.
  • Triggers the release of dopamine.
    • Targets brain regions controlling reward and movement.
    • Compensation we receive for valuable effort.
    • Stimulates the wanting of something, rather than the liking of it.
    • Values cues that predict pleasure (craving, desire).
• Dopamine fuels desire for information and unexpected rewards: risk.
  • Dopamine release depends on unpredictability of pleasure.
  • Dopamine spikes with information, novelty.
  • We like environments that are unpredictable, unexpected rewards.
  • Perhaps curiosity itself, the need to know, is a form of addiction.
• Dopamine also prepares the body for action.
  • Rewards us for novel physical actions that lead to unexpected reward.
  • Action and reward go together.
• Drives us to push beyond established routines and to try new search patterns.
  • Love of risk taking, exploration, spontaneous optimism.
• Humans have a preference for effortful consumption
  • Dopamine makes us want to repeat certain actions,
  • We don’t want to be fed, we want to hunt.
• Importance of “enriched environment”.
  • Providing sufficient novelty for explorative behavior, dopamine release.
• Cortisol magnifies the effects of dopamine.
  • Positive: intense stimulation, focus, satisfaction.

Testosterone: hormone of irrational exuberance, anabolic.

• Coordinates longer-term physical response to the environment.
  • Works on a slow time scale.
  • Needs to be produced on demand (can’t be stored in cells).
  • Drives gene transcription (production of proteins).
  • Also increases impact and release of dopamine.
• Prepares the body for action, competition.
  • Anabolic impact.
  • Quickens reaction, helps build lean muscle, increases persistence and fearlessness.
• Positive feedback loop: winner effect.
  • Testosterone rises or falls in tandem with performance in competitive environments.
  • Confidence => over-confidence => rash behavior.
• Release can be triggered by rituals, physical exercise, outside stimuli.
• Levels fluctuate dramatically.
  • Seasonal, circumstances, over the course of a life.
  • Drives timing of anabolizing and masculinizing effects.

Cortisol: hormone of the stress response, catabolic.

• Rapid switch in body and brain away from everyday functions to a state of emergency.
  • Response to imminent threat.
• Unfolds in stages.
  • Brain: (pre-consciously) registers a threat.
    • Thalamus: quick and dirty formatting of incoming information.
    • Amygdala: assesses emotional significance.
  • Body: visceral organs react.
    • Heart rate and blood pressure increase, breathing accelerates.
  • Immediate hormonal response is triggered: fight-or-flight.
    • Hypothalamus triggers release of (short-acting) adrenaline from adrenal glands.
      • Marshall resources (glucose, oxygen).
      • Shut down long-term functions (digestion, reproduction, energy storage).
  • Longer-term hormonal response is triggered: cortisol.
    • Reverses the body’s anabolic processes.
      • Breaks down energy stores.
      • Blocks the effects of testosterone and insulin (growth hormones).
      • Powerful anti-inflammatory.
• Situations that signal threat and elicit a stress response:
  • Novelty (be ready because we don’t know what to expect).
  • Uncertainty (same).
    • Uncontrollability.
• Short-term, moderate stress response = good.
  • Allows for focused attention and heightened awareness.
• Long-term, chronic stress response = bad.
  • Impaired cognitive function, less focus, lower concentration.
• Caused by long-term impact of cortisol on the brain:
  • Cortisol helps us store and retrieve memories in the brain.
    • In amygdala (emotional significance, increases) and the hippocampus (factual details, shrinks).
  • Thinking becomes more emotional, less factual.
    • Selective attention to on negative memories, rumors, imaginary patterns.
    • Risk aversion.

Controlling the stress response

• Stress response can be dysfunctional in modern environment.
  • Contributes to many mental and physical disorders.
• Need resilience => proper mix of hormones, neurotransmitters, nervous system activation.
  • Hormones:
    • Catabolic hormones: short-term metabolic support when challenged.
    • Anabolic hormones: rebuild repleted energy stores.
    • Cycling between stress and rest.
    • Growth index: ratio of anabolic to catabolic hormones = measure of immunity to daily stress, state of preparedness.
  • Amines (adrenaline, noradrenaline, dopamine).
    • Short-term, fast acting fight-or-flight response, shut off quickly.
    • A strong amine response avoids the longer-term cortisol response.
  • Vagus nerve.
    • Efficient tool for conserving energy, minimizing stress.
    • Calibrate and select appropriate stress response: freezing, fight-or-flight, social engagement.
    • Good vagal tone = select proper response = high HRV.
      • HRV: breathe in, heart rate speeds up; breathe out, it slows down (rest).
• Develop greater mental and physical toughness.
  • Mental toughness: view novelty as a positive challenge, not a negative threat.
  • Issue: very little conscious control.
• Can be trained through repeated short exposure to stressors.
  • Similar to physical toughening: stress-recover-stress-recover.
• What types of stressors:
  • Physical stress: exercise.
  • Thermal stress: exposure to cold (weather, water).
• Or reduced by avoiding the conditions that bring on stress:
  • Reduce novelty, increase familiarity.
    • Reducing uncertainty, giving people modicum of control.
• Or by triggering the vagus nerve (breathing exercises).

 The markets.

• If you want to reduce the impact of testosterone feedback loops on markets:
  • Older men: lower levels of testosterone + experience.
  • Women: lower levels of testosterone + less stressed by competition + better at long-term risk taking.
    • Short term hormonal response: less fight-or-flight, more tend-and-befriend.
    • Longer term hormonal response: less stressed by completion, more by social situations.
• Maybe you don’t want to: let testosterone “terrorize” markets, rather than society.
  • But, the issue is isolation of young males without corrections, not testosterone per se.
  • Need diversity, representation of older and female population.

Basic brain anatomy.

• Brain stem (reptile brain):
  • Controls automatic processes (breathing, etc.)
• Cerebellum:
  • Motor skills.
• Hypothalamus:
  • Regulates hormones and drives coherent emotional behavioral responses.
• Amygdala:
  • Processes information for emotional meaning (danger, etc.)
• Neocortex:
  • Discursive thought, planning, voluntary movement.
• Insula:
  • Gathers and integrates information from the body.
• Locus Ceruleus:
  • Most primitive part of the brain (top of the spine).
  • Responds to novelty, promotes state of arousal.
  • Reacts when correlations break down and new patterns emerge.
  • Registers the change before conscious awareness.