A new study linked hormone levels to risky investment behavior of traders.
A new study shows that hormones testosterone and cortisol may destabilize financial markets by making traders take more risks. The researchers simulated the trading floor in the lab by having volunteers buy and sell assets among themselves. They measured the volunteers' natural hormone levels in one experiment and artificially raised them in another.
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When given doses of either hormone, the volunteers invested more in risky assets. This is not necessarily surprising as everybody know from experience to make different decision in different moods.
The study used 142 volunteers, male and female, playing an asset trading game in groups of around 10. Those who had higher levels of cortisol were more likely to take risks, and high levels in the group were associated with instability in prices.
The researchers think the stressful and competitive environment of financial markets may promote high levels of cortisol and testosterone in traders. Cortisol is elevated in response to physical or psychological stress, increasing blood sugar and preparing the body for a fight-or-flight response. Previous studies have shown that men with higher testosterone levels are more likely to be confident and successful in competitive situations.
"Our view is that hormonal changes can help us understand traders' behavior, particularly during periods of financial instability," said Dr Carlos Cueva, one of the lead authors of the study, from the Department of Economics at the University of Alicante.
Dr Ed Roberts, one of the lead authors of the study, from the Department of Medicine at Imperial College London, said: "Our aim is to understand more about what these hormones do. Then we can look at the environment in which traders work, and think about whether it's too stressful or too competitive. These factors could be affecting traders' hormones and having an impact on their decision-making."
Economists have long recognized that the unpredictability of human behavior can make financial markets unstable. John Maynard Keynes wrote of "animal spirits" and Alan Greenspan and Robert Shiller alluded to "irrational exuberance" as a possible cause of overvaluations in asset markets. However, scientists have only recently begun to explore the physiological basis for this phenomenon.
Professor Joe Herbert, a co-author of this study from the Department of Clinical Neurosciences at the University of Cambridge, reported in an earlier field study that traders made significantly higher profits on days when their morning testosterone levels were above their daily average, and that increased variability in profits and uncertainty in the market were strongly correlated with elevations in their cortisol levels.
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The study titled "Cortisol and testosterone increase financial risk taking and may destabilize markets." has been published in Scientific Reports, 2 July 2015 here.