Could Traders’ Hormones Be Destabilising Financial Markets?

Researchers simulating the pressure-driven financial trading floor in the lab have found that traders’ changes in both cortisol and testosterone could play a destabilising role in financial markets through increased risk taking behaviour.

Investigation into the behavioural sciences has long highlighted the important influence of hormonal variations in a wide variety of contexts, yet their role in economic decision-making has only begun to be examined, according to a new study published in Scientific Reports.

Hormones affect people’s ability to make rational decisions

According to the research, although it is widely known that financial markets can become dangerously unstable, it is unclear why. Could the answer lay in hormones?

The study found that both cortisol and testosterone shifted investment towards riskier assets. Cortisol appears to upset risk preferences directly, whereas testosterone operates by injecting increased optimism about future price changes.

“It is possible that the effect of cortisol or testosterone on investment behaviour was mediated by changes in price expectations, confidence, ability or attitude to risk,” researchers said.

“Our view is that hormonal changes can help us understand traders’ behaviour, 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, Spain.

Could Traders' Hormones Be Destabilising Financial Markets? - Clapway

Understanding the psychology behind financial markets

Researchers found that when artificially given doses of either cortisol or testosterone, the participants buying and selling assets among themselves invested more in risky assets.

Around 150 volunteers, male and female, participated in the study and were asked to play a stock market game while their hormone levels were being measured through saliva samples.

The research consisted of two experiments. Volunteers’ natural hormone levels were measured in one experiment and artificially raised in another.

In the first one, 142 male and female volunteers played a trading game in groups of 10 during which natural levels of hormones were measured. For men, higher level of cortisol made them more likely to take risks leading to unstable prices, while women did not show any links, suggesting that they respond differently to stress.

The second experiment involved 75 young men. They were given one of the two hormones before playing the trading game, and then a placebo. The cortisol seemed to have generated riskier investments while testosterone made them feel confident and successful in competitive situations.

Previous research suggests that male traders made higher profits when their morning testosterone levels were above their daily average. Overall, however, both hormones had an effect toward greater risk-taking in investments.

Developing more stable financial markets

Scientists now feel there might be a way to stabilise the financial markets by understanding how traders’ levels of testosterone and cortisol affect their performance.

“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,” said Dr. Ed Roberts, from the department of medicine at the UK’s Imperial College London.

The study’s authors suggest these findings could be considered by policymakers to develop more stable financial markets.


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