Male hormones & irrational trading
And you thought financial market trading success was all about smarts and experience: a new study indicates that male hormones may play a major role in decision making by successful traders.
John M. Coates and Joe Herbert of Cambridge University in England sampled the levels of two hormones—cortisol and testosterone– in male floor traders in London’s financial district. They correlated levels of the two hormones at 11 a.m. and 4 p.m. each day with each trader’s hits and misses.
They found a correlation between high testosterone levels at 11 a.m. on particular days and higher profits on those days.
"Testosterone increases competitiveness, aggressiveness, risk taking. That's what testosterone does. For males to achieve reproductive success, you need to take these risks. Now, an ancient biological system is working in a new, man-made environment,” said Herbert, a neuroscientist who studies how hormones affect the brain’s function.
The cortisol downer
By contrast, on days when the markets were falling, samples of traders showed higher levels of cortisol, a hormone associated with stress.
“Cortisol has massive effects on brain function, it makes you anxious, sometimes depressed, causes you to react more strongly to adversity, to remember adversity,” Herbert said. “It’s a rather depressing hormone.”
Unreasonable risk?
Although there seems to be a short-term correlation with testosterone, risk taking, and trading success, the researchers cautioned that repeated testosterone boosts may lead to irrational risk taking.
Repeated wins and increased hormone levels can make an individual overreach and make rash decisions.
Coates theorizes that this happens during market manias, helping to boost financial bubbles.
He observed this type of behavior as a Wall Street trader during the 1990s boom.
Alternatively, during market downturns increases in cortisol can provoke excessive caution, exacerbating the decline.
A more stable financial system might come about if more women and older men with less testosterone were trading, Coates said.