The Hour Between Dog and Wolf

by John Coates

  Thermal stress is a natural part of our life, so if it is eliminated a fundamental part of our physiology may atrophy. The great physiologist Walter Cannon hinted at something like this back in the 1920s. Displaying an extraordinary prescience, he worried about the advent of central heating, air conditioning and hot running water, because these conveniences threatened to deprive us of the opportunity of exercising our systems of thermoregulation. ‘It is not impossible,’ Cannon warned, ‘that we lose important protective advantages by failing to exercise these physiological mechanisms, which were developed through myriads of generations of our less favored ancestors. The man who daily takes a cold bath and works until he sweats may be keeping “fit”, because he is not permitting a very valuable part of his bodily organization to become weakened and inefficient by disuse.’ Today we may be paying a high price for our modern comforts. In fact, Cannon’s fears of a decline in fitness may have been justified: recent evidence suggests that the widespread adoption of climate control in home, car and office may be one cause of the current obesity epidemic. The disappearance of thermal stress from our lives may have another unintended consequence: it may have largely eliminated a valuable toughening process.

  It is too early in this research to recommend any particular toughening regime as a way for risk-takers in the financial world and elsewhere to build up a resilience to the stress that inevitably accompanies their job. However, I think financial institutions should take seriously the fact that a trader’s ability to handle risk involves a lot more than a knowledge of probability, macroeconomics and formal finance. Traders need to be trained so they can recognise and handle the physiological changes resulting from their gains and losses, and from market volatility. These training regimes will have to be designed in such a way that they access the primitive brain, not just the rational cortex. Since the body profoundly influences sub-cortical regions of the brain, the new training programmes may turn out to involve a lot more physical exercises than they do at present. Banks and hedge funds could potentially learn from the programmes of top-class athletes, for they are the people with the most experience of controlling their hormones and emotions in the interests of optimising performance.

  LEARNING TO LISTEN

  Is there anything we can do once exhaustion, fatigue, anxiety or stress have set in? To answer this question we must bear in mind that these conditions are messages sent from our body telling us what actions we should take, and we need to understand what they are saying. Quite often, though, we misunderstand these messages. A telling example can be found in our understanding of mental fatigue. Common sense tells us that it is a state of exhaustion, in which we have quite simply run out of energy, like a car running out of gas. The recommendation that naturally follows is a rest or vacation to replenish our energy reserves. Exhaustion of this kind certainly occurs. Run a marathon, and chances are you end up in a state of exhaustion; pull an all-nighter, and chances are you need some sleep. But more often than not, this is not the cause of mental fatigue. Often, mental fatigue disappears if we merely change activities, and that would not happen if we had exhausted our fuel.

  A recently developed model in neuroscience provides an alternative explanation of fatigue. According to this model, fatigue should be understood as a signal our body and brain use to inform us that the expected return from our current activity has dropped below its metabolic cost. The brain quietly searches for the optimal allocation of attentional and metabolic resources, and fatigue is one way it communicates its results. If we are engaged in some form of search and have not turned up any results, our brain, through the language of fatigue and distractibility, tells us we are wasting our time and encourages us to look elsewhere. The cure for fatigue, according to this account, is not a rest, it is a fresh task. Support for this idea comes from data showing that overtime work does not in itself lead to work-related illness such as hypertension and heart disease; these occur mainly if workers have no control over the allocation of their attention. Applying such a model could benefit workers and managements alike, for more flexibility in choosing what to work on, and when, could reduce worker fatigue, while management might be delighted to find that workers may be just as refreshed by a new assignment as by a vacation. This model of fatigue provides a good example of how understanding a bodily signal can alter the way we deal with it.

  Novelty may thus prove rejuvenating when we are battling fatigue, but under other circumstances it can turn toxic – when, for example, we are trapped in a state of chronic stress. Berlyne’s n-shaped hill displays how novelty and complexity beyond moderate levels can promote anxiety. If we return to chronic stress and look at the influence of novelty in this condition, we can find another example of how we frequently misunderstand the source of our problems.

  In a novel situation we do not know what to expect, so our body mounts a preparatory stress response. That much is perfectly understandable. What is less obvious is that it does not seem to matter whether the novelty is welcome or dreaded, for either can exacerbate chronic stress. This conclusion emerged from a study by two psychiatrists who compiled a list of life-changing events, known as the Holmes and Rahe Social Readjustment Rating Scale, which they used to predict future illness and death. They found that all the obvious stressors, such as divorce, the death of a spouse or financial difficulties, predicted a heightened risk of illness and death. But also high on their list were more welcome changes, such as marriage, the birth of a child, a change of job or, incredibly, outstanding personal achievement. While these events were no doubt welcome, they added novelty to the lives of the recipients, and that could later take a toll on their health. Our complete unawareness of the damage being inflicted on us at such times is one reason hypertension and heart disease are called silent killers.

  Findings such as these can change the way we handle chronic stress. When we are mired in stress, what we desperately need to do is minimise the novelty in our lives. We need familiarity. But quite often we seek out the exact opposite, responding to chronic stress at work, for example, by taking a vacation in some exotic place, thinking that the change of scenery will do us good. And under normal circumstances it does. But not when we are highly stressed, because then the novelty we encounter abroad can just add to our physiological load. Instead of travelling, we may be better off remaining on home turf, surrounding ourselves with family and friends, listening to familiar music, watching old films. Exercise, of course, can help, in fact there are few things better at preparing our physiology for stress, but when someone is this far into chronic stress its effects, suggests Stephen Porges, are mostly analgesic, possibly because exercise treats us to a shot of natural opioids. Again, what we really need is familiarity.

  Besides dampening physiological arousal, familiarity can have another beneficial effect. It can convince our vagus nerve, that angel of mercy, to become maximally involved in our problems, take charge of our shattered body, and calm things down. The vagus has in its hands the power to slow our stressed heart, ease our breathing, settle our stomach. It can save our life. But in order to do so, it needs familiar surroundings, and more specifically the faces and voices of friends and family. As we have seen, the vagus ties together face and voice, and the brain stem regions controlling arousal. Familiar voices and happy faces let our brain stem know that fight-or-flight is not needed, so the vagus informs the body that it can stand down from a state of high alert. If you are blessed with a calm family and friends whose fortunes are uncorrelated with your own, it can help enormously in times of stress just to look into their faces and listen to their happy voices, rather than staring at your BlackBerry, gnawing on your fingernails and ruminating over past outrages.

  The vagus remains something of a mystery, so we are not yet in a position to fully understand how else we can engage it. Vagal nerve stimulation (VNS), in which an electronic device is implanted in the chest to artificially stimulate the nerve, has met with success in treating otherwise intractable depression and chronic
pain, although how exactly it achieves its results is not fully understood. But we do know a few things.

  As we have seen, the dive reflex, triggered when you splash or submerge your face in cold water, can engage the vagus and slow the heart, breathing and metabolism. Breathing exercises, involving slow, deep breaths from the diaphragm, rather than short, shallow ones from the chest, can also bring the vagus online, as will similar practices, suggests Porges, such as ‘playing wind instruments, singing, and even expanding the duration of phrases when talking – all will have a profound effect on vagal influences to the heart’. The calming effect of controlled breathing is a well-known biofeedback practice. It also forms an important part of yoga, meditation and some Eastern religions, especially the Buddhist art of mindfulness, in which mind and body are united through a focused attention on breathing. This exercise may have further benefits: the neuroscientist Read Montague and his colleagues have found that people practising Buddhist meditation engaged their gut feelings more than others, and as a result made more rational choices in a financial decision-making task. Research into stress, the vagus and gut feelings is in this way building a bridge between East and West.

  We have only just started to understand and harness the power of the vagus nerve. Can we increase vagal tone? Can we train this nerve to come online sooner and act more powerfully, so we rely less on the metabolically expensive fight-or-flight response, or worse, the full stress response, with its attendant high levels of cortisol? Given the power and the range of action of the vagus, finding the answers to these questions represents something of a Holy Grail for stress research.

  STRESS IN THE WORKPLACE

  Beyond individual toughening regimes, are there any objective changes we could make in the workplace to reduce stress? Novelty, uncertainty and uncontrollability seem endemic to the markets themselves, so how could banks minimise these conditions? Should they even try? Maybe not. At moderate levels, uncertainty in markets provides a spark igniting the risk-taking that is the allotted role of a bank. But that is not what I am concerned with here. What concerns me is the debilitating effects of chronic stress on health, risk-aversion and, beyond that, financial market instability. Can management learn anything from physiology to help it alleviate these pathological conditions? I believe it can.

  The Whitehall Studies mentioned in the previous chapter looked at the health consequences of job insecurity and uncontrollability in the British civil service, and found that the uncertainty created among employees led to a noticeable increase in hypertension, cholesterol levels and heart disease. My colleagues and I similarly found that market uncertainty, as measured by volatility and uncontrollability in traders’ P&Ls, had a very powerful effect on their cortisol levels.

  Reducing uncertainty and giving people even a modicum of control can have noticeable health effects. Doctors have found this with patients experiencing pain, who suffered even more when they did not know when they would get their pain medication. In a radical experiment, a few doctors gave patients the ability to administer the painkillers themselves, and the amount used actually dropped. Removing the uncertainty and uncontrollability had the effect of reducing the need for painkillers. Pain is a signal, telling us to keep off damaged tissue; and during stress, it is reasonable to assume, the signal is warning us that we are in greater danger of doing more damage. Remove the stress, and perhaps the signal no longer needs to be quite so strong. Patient-controlled analgesia, as it is called, has now become standard practice in many hospitals.

  It may not be possible to eliminate uncertainty and uncontrollability in the workplace, so it behoves workers to reduce uncertainty and establish as much control as possible outside the workplace, in their personal lives. We may not be able to control the financial markets, but we can exert some control over our own bodies, what we eat, how often we go to the gym, who we spend time with, etc. By doing so we gain a toehold amidst the chaos, and this can convince us – delude us, if you will – into believing we are in charge. It may be an illusion, and it may not stop you from losing money or even being fired, but it can help reduce the long-term damage to your body.

  Another powerful antidote to the physical damage wrought by uncertainty and uncontrollability is social support. A circle of close friends and family, and a supportive management team at work, can be a particularly potent force in mitigating the damage of stress. Just how potent became apparent from a study on stress and mortality conducted in Sweden. The researchers interviewed 752 men, asking them to indicate how many serious life events had occurred to them recently, such as divorce, being fired or financial troubles. Seven years later, the researchers followed up on the men. The death rate among those who had reported being chronically stressed was three times higher than among those who had reported no stress. However, among the men who did report stress, those who had a supportive circle of friends and family showed no correlation at all between the stressful life events and increased mortality.

  Equally effective in combating the effects of uncertainty and uncontrollability in the workplace is a policy of devolving control. In their pioneering book Healthy Work, mentioned in the previous chapter, Theorell and Karasek investigated a highly influential management model in which specialised workers mechanically execute plans handed down by upper management. Most jobs in companies adhering to this model had a high workload and low control; they also had a high incidence of stress-related illness. Theorell and Karasek asked whether illness in the workplace is the inevitable price we pay for higher profits. They concluded that it is not, that a healthy worker is a productive one. Moreover, a healthy worker is one with far lower medical costs, and these can add up to substantial savings both for the employing company and for the economy as a whole. Their research, and other studies like it, suggests that levels of workplace stress and worker health should become goals of management just as much as short-term profits. Theorell and Karasek cite the case of a Volvo car plant in Sweden which devolved control over many details of production to small groups of workers, and found that the incidence of stress-related illness dropped noticeably.

  In banks the stress of uncertainty and uncontrollability stems from the market and P&L, but also, as in other workplaces, from the chain of command. Some of these sources of uncertainty are easily minimised. Certain hedge funds, for example, recognise that trading involves two separable stages, conceiving a trade and executing it, and that responsibility for the latter can be removed from the decision-makers and given to an execution desk. Many traders miss the execution side of trading, but managers who have tried this innovation believe it reduces stress and improves decision-making. Banks employ another tactic to reduce their traders’ stress and feelings of uncontrollability. When financial crises hit, traders often end up with large positions in risky assets, such as mortgages or junk bonds, which they cannot sell. The losing positions hang around their necks like a deadweight, making daily trading all but impossible. Upper management often removes these positions from the accounts of individual traders so they can concentrate on new business.

  Within the banks the most potent source of novelty, uncertainty and uncontrollability is, however, managerial instability. When crises hit and traders lose money, they will inevitably suffer stress, but this stress is nothing compared to that generated by the rumours that swirl around a bank about layoffs, management shake-ups, someone else taking over your responsibilities, and so on. These, I believe, cause the bulk of stress in a bank; and unfortunately this type of stress usually occurs just when we can least handle it, during a crisis. If we want to stabilise risk preferences in the financial sector, or at least those shifts in risk preferences that stem from stress-related physiological changes, we should reduce as much as possible the stress coming from management. The market may not be controllable, but stress coming from managerial instability can be, at least much more than it is at present.

  Middle management during crises often acts like those dominant monkeys that, when subjected to st
ress, take to bullying juniors. Senior management should therefore restrain middle managers from venting their frustration on traders (and salespeople), no matter how hard that is, no matter how deserving of termination they may be. If this sounds as if I am arguing for a cosy and supportive atmosphere for traders who may well have helped blow up our financial system, I am not. I am concerned rather with stabilising risk preferences among a financial community that may develop, as a crisis wears on, into a clinical population. Once that happens, the entire economy suffers.

  The most effective way of reducing stress in the financial world, however, may be to stabilise the nature of bankers’ and traders’ careers. We have to make employment in the financial sector more akin to building a career than to elbowing for room at the roulette wheel. In an ideal bank we would find bonus incentives, risk-management schemes and hiring policies designed to counteract the instability in our biology, smoothing out the waves. But unfortunately what we find is precisely the opposite – bonuses, risk limits and hiring practices that operate in a powerfully pro-cyclical manner, expanding during the boom, contracting during the bust. To see how this works, we can begin by taking a closer look at bonus payments. Consider, therefore, the following scenario involving two traders, let us call them Tortoise and Hare.

  Tortoise makes his employing bank $10 million a year for five years, and receives a yearly bonus of $1 million. Hare makes $100 million a year for four years, receives a yearly bonus of $20 million – the higher percentage payout is to keep this star from leaving for a hedge fund – but in the fifth year loses $500 million and receives no bonus. Despite Hare’s huge loss, he does not have to repay his past bonuses. Doing our sums, we find that at the end of five years Tortoise has made the bank $50 million and has been paid $5 million, while Hare has lost the bank $100 million yet has pocketed $80 million.