August 11, 2012

The hour between dog and wolf by John Coates

The hour between dog and wolf by John Coates

Risk taking, gut feelings and the biology of boom and bust.

It is enlightening to see our behavior as an elaborate mechanism designed to maintain homeostasis. However, before we go too far down the path of biological reductionism, I have to point out that hormones do not cause our behavior. They act like lobby group, recommending and pressuring us into certain types of activity. One group of hormones has particularly potent efforts on our behavior - steroid hormones. This group includes testosterone, estrogen and cortisol, the main hormone of the stress response. Steroids exert particularly wide spread effects because they have receptors in almost every cell in our body and brain.

McEwen’s research on steroids shows how brain works: the hypothalamus sends a message to a gland instructing it to produce a hormone; the hormone fans out across the body, having its physical effects, but it also returns to the brain, changing the very way we think and behave. Now, that is one potent chemical. Indeed, subsequent research by MceWen and other showed that a steroid hormone, because of its widespread receptors, can alter almost every function of our body (its growth, shape,metabolism, immune function) and of our brain, (its mood and memory and of our behavior).

During moments of risk taking, competition and triumph, of exuberance, there is one steroid in particular that makes its presence felt and guides our actions - testosterone.  Testosterone-fueled behavior is life winner effect. Winner effect works this way: two males enter a fight for turf or a contest for a mate and in anticipation of the competition, experience a surge in testosterone, a chemical bracer that increases their blood’s capacity to carry oxygen and in time, their lean-muscle mass. Testosterone also effects the brain, where it increases the animal’s confidence and appetite for risk, After the battle has been decided the winner emerges with even higher levels of testosterone, the loser with lesser levels, The winner, if he proceeds to a next round of competition, does so with already elevated testosterone and this androgenic priming gives him an edge, helping him win yet again. As testosterone level rise, confidence and risk taking segue into overconfidence and reckless behavior.

Cortisol is the main hormone of the stress response, a body wide response to injury or threat, Coristol works in tandem with adrenaline, but while adrenaline is a fast-acting hormone, taking effect in seconds and having a half-life in the blood of only two or three minutes, cortisol kicks in to support us during long siege.

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 talking and exaggerate the rally, morphing it into bubble. Cortisol, on the other hand, is likely to rise in a bear market, make traders dramatically and perhaps irrational risk averse and exaggerate the sell-off, morphing it into a crash.  Steroid hormones building up in the bodies of trades and investors may this shift risk preferences systematically across the business cycle, destabilizing it.

We are so completely enthralled by information that one could, without exaggeration, say we are addicted to it. The addiction develops under the influence of another neuromodulator, this one called dopamine. Produced by a group of cells at the top of the brain stem, dopamine targets brain regions controlling reward and movement. When we receive some valuable piece of information, or perform some act that promotes our health and survival such as eating, drinking, having sex or making large amounts of money, dopamine is released along what are called the pleasure pathways f the brain, providing us with a rewarding even euphoric experience. In fact, our brain seems to value the dopamine more than food or drink or sex itself.

Unfortunately dopamine neurons are easily duped, and can be tricked into bestowing their rewards by drugs of abuse. Almost every recreational drug, be it alcohol, cocaine or amphetamines, achieves its additive effects by increasing the action of dopamine in a region of the brain called the basal ganglia, located midway between brain stem and the cortex and specifically one part of it,  is called the nucleus accumbens.

Food can raise an animal’s dopamine levels by 50%, sex by 100%, nicotine by 200%, cocaine by 400% and amphetamines by 1,000%.  There are two types of rewards - the pleasure of consumption and the pleasure of anticipation. Some cues such as smell of our favorite restaurant, the exciting appearance off in the distance of ski slopes can involve dopamine effect. Many addicts actually come to lose the pleasure they once enjoyed from drugs, may even find the actual consumption distasteful but cannot stop. In order to kick a habit they now find unpleasant addicts often they have to separate themselves from drug taking cues by changing neighborhoods and avoiding old friends.

Hormone signaling process from hypothalamus to the production of steroids hormone, takes up to fifteen minutes just to get started. It takes even longer for steroids to take affect - hours or even days. The process may be slow, but the way steroids work in unique in the human body. They cross membranes, enter the cell nucleus and cause gene transcription. In other words, steroids cause proteins, the building blocks of the body to be manufactured. Steroids have receptors in almost every nucleated cell in the body. All these properties of steroids give you an inkling of their power. A single steroid like testosterone can cause a bewildering suite of physiological changes, building up bone density and lean-muscle mass, increasing hemoglobin and clotting agents in your blood, heightening mood, tormenting you with sexual fantasy and tilting behavior towards greater risk taking,. By doing so, testosterone orchestrates a focused and coordinated physical response to the competition and opportunity at hand.

It was in the year 1913 class of steroids was isolated by a German scientist named Adolf Butenandt who got Nobel prize with his team for chemistry in 1939 and when Nobel committee asked about testosterone, Butenandt exclaimed, “Dynamite, gentleman, it is pure dynamite”.

The Y chromosome of XY pair (male) has a gene called SRY which produce testosterone. X chromosome can swap material with another X chromosome, thus ensuring that each generation is fitted with new parts. But not so the isolated Y chromosome, which does not get new parts. This lone wolf has nothing it can swap with; so over time, it compounds the problem and accumulates damage until its genes, one by one, die off. Some animals, such as the kangaroo, now have only a few genes remaining on their Y chromosome. This slow death of Y chromosome is called Adam’s Curse by Geneticist Bryan Sykes who predicts that in five thousand generations men will be extinct.

Testosterone levels fluctuate over a course of man’s life. Spikes just after birth and then subside until puberty. Later, beginning in his early 30s, a man’s testosterone levels begins to fall and continue to do so over the rest of his life. Having high level of testosterone brings high energy level, high risk taking mentality, & high sex drive (common during teen / youth days). In trading desk, routine testosterone steroid injection helps the trader to take risky bets that they otherwise wouldn't bet.

(Some people has high testosterone levels by birth – if your ring finger is longer than your point finger, then you are a macho man :)

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