Researchers say Traders’ testosterone ‘makes them take financial risks

Citing John Maynard Keynes “animal spirits” and Alan Greenspan and Robert Shiller’s uses of the phrase “irrational exuberance”, a study appearing in Scientific Reports suggests hormonal surges could lead to financial market instability. “Then we can look at the environment in which traders work, and think about whether it is too stressful or too competitive”, said lead author Dr Ed Roberts from department of medicine at Imperial College London. The participants were tested once when they were on hormone and once when they were on a placebo. Do they perform as rationally as they would if they were in a group that’s mixed?

Raised levels of the hormones testosterone and cortisol can make traders take more risks, which could create instability in financial markets, a study suggests.

The researchers say,

“Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behavior, acting via different behavioral pathways.”

The findings build on earlier analysis that established that men are more likely to take chances than women. The study cites this concentration, along with the dominance of male traders in the financial industry, as a possible explanation for some of the less successful and more impulsive moves made by bankers and financiers in recent years.

The research consisted of two experiments.

A few 142 volunteers, male and female, participated in the study, giving saliva samples for the measurement of the two hormones. Both cortisol and testosterone were associated with “high variance” stocks – those with wider price movements. It was important to know how hormones affected traders.

The second experiment involved 75 young men.

Those with artificially-heightened levels of cortisol became outwardly riskier within their trade patterns, chancing potentially unsuccessful transactions and not appearing to consider implications of failure.

Cortisol is elevated in response to physical or psychological stress, increasing blood sugar and preparing the body for a fight-or-flight response. The effects often fade quickly. Profiting from a trade can generate the hormone, resulting in self-confidence that can produce more success and more testosterone, Roberts said.

Cortisol and testosterone “build on each other”, he said.

According to the study, the naturally-occurring steroids have been found to markedly increase the chances of risk-taking and audacious behaviour in men whose responsibilities include commercial and economic transactions.