Sunday, June 10, 2012

John Coates — The Biology of Bubble and Crash

WHAT happens to your body when you take risks? What happens to it when you make or lose money? Economics rarely asks these questions. It tends to view the assessment of financial risk as a purely intellectual affair, involving the calculation of asset returns, probabilities and allocation of capital. It is economics from the neck up.

But to this bloodless account of decision making, I want to add some guts. Advances in neuroscience and physiology have shown that when we take risk, we do a lot more than just think about it. We prepare for it physically.

Read the rest at The New York Times Sunday Review | Opinion Pages
The Biology of Bubble and Crash
by John Coates, a research fellow at Cambridge University and a former derivatives trader. This essay is adapted from his forthcoming book, The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust.
(ht Mark Thoma)

This report gives "animal spirits" and "irrational exuberance" concrete meaning in physiology and correlated psychology and behavior. These are not just cognitive biases but also physiological conditions.

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