Hormonal surges may contribute to market volatility
By John Timmer | Published: April 14, 2008 - 05:24PM CT
I’ve often made the joke about men suffering from testosterone poisoning, but I wasn’t expecting to read a study that took the possibility seriously. That study will be appearing later this week in PNAS, and it focuses on the role of hormones in an environment that’s been referred to as "testosterone drenched"ï¿½??the trading desks of a financial firm. The study’s authors argue that hormonal changes, including that of testosterone, would be expected to play a role in the actions of traders, and set out to gather evidence to support that argument.
The background is pretty straightforward. Testosterone has been found to, as they put it, “increase search persistence, appetite for risk, and fearlessness in the face of novelty.” All of these could play a positive role in financial trading. The upsides come with a danger, though, as success tends to further increase testosterone levels. Once testosterone gets high enough, it increases impulsiveness and the tendency to take dangerous risks, and can even lead to manic behavior. Testosterone doesn’t act in a vacuum, though. The authors also considered the role of cortisol, which becomes elevated in stressful situations. Cortisol may limit the impact of testosterone, as long-term exposure increases the probability that negative consequences of decisions will be considered.
The researchers measured the hormone levels of 17 volunteers at a London firm at two times, prior to and immediately after the trading day. They also registered each traders’ profit and loss for the day, and obtained measurements of market volatility for the period of the study (which covered eight business days).
The testosterone levels displayed a clear trend. A trader with a testosterone reading above their median level before trading commenced typically produced a higher profit than if the reading was below their median. That difference tended to persist until the markets closed, but it clearly predated any influence of trading success. Meanwhile, cortisol levels appeared to be completely independent of success or failure, but they did show a correlation with market volatility for any day.
The authors try to consider how each of these may play into volatile market conditions, but the analysis is fairly unconvincing. It’s not clear whether the levels seen here are sufficient to cause the irrational tendencies fostered by long-term hormonal imbalances, so it’s difficult to interpret them. Nevertheless, it does raise the possibility that both bubbles and crashes set off a hormonal chain reaction that accentuates questionable decision making. The only clear data, however, are those that suggest that men who start their days with a little extra testosterone have an edge in trading.
PNAS, 2008. DOI: 10.1073/pnas.0704025105