If a stock market that swings 400 or more points in a single session
has been making you queasy—not to mention too terrified to check your
401(k) balance—at least we now know who to blame: men and their raging
hormones.
It’s a Wall Street cliché that the most successful traders are those
with nerves of steel and you-know-whats the size of softballs.
Scientists from the University of Cambridge therefore decided to
measure what, exactly, is going on with traders’ testosterone (which is
linked to the latter) and cortisol, the stress hormone. What they found, as they report in this week’s online edition of the Proceedings of the National Academy of Sciences],
is that when male traders have high levels of testosterone in the
morning, they make more profits than their daily average that day, and
when market volatility is high their cortisol levels soar. Since both
hormones are well-known to impair thinking, the scientists warn, high
levels can make traders “display the irrational behavior often observed
in real markets,” make traders take more risks, and exaggerate
downturns in the market.
Sound familiar?
For their study, Cambridge’s John Coates and Joe Herbert
recruited 17 traders, all men working for a financial firm in London.
Most of the traders in the study, who were 18 (!; that’s not a typo) to
38 years old, focused on German interest-rate futures, making trades
valued at £100,000 to £500 million, or about $196,000 to $980 million.
For eight business days in a row, the traders gave the scientists
saliva samples, from which the researchers measured levels of
testosterone and cortisol.
Tons of studies on testosterone have shown that this “male” hormone
(that’s in quotes because women have some, too) rises in athletes
preparing for a competition, spikes even more in winning athletes and
falls in losers. Testosterone seems to increase both confidence and
risk taking. That can increase the chance of winning again.
That seemed to be what happens with the traders. Daily testosterone
levels were significantly higher on days when they made especially high
profits on their transactions, Coates and Herbert find. How? Because,
according to other studies, high testosterone levels have been found
to make men “increase search persistence” (that is, you keep looking
for information of the wisdom of a trade), take greater risks (which
can be a winning strategy if you usually make profitable trades) and
display “fearlessness in the face of novelty,” such as when unexpected
news hits the markets.
As for cortisol, it seemed to reflect how volatile the German market
was: dizzying swings stressed out the traders. No surprise there.
But perhaps some red flags. Levels of both hormones were high enough
to have cognitive and behavioral consequences, “specifically by
shifting risk preferences or disturbing the neural basis for rational
choice,” write the scientists. Exactly how this happens is the subject
of intense research. But what neuroscientists know is that a handful of
brain regions—the amygdala, anterior insula and nucleus accumbens—are
the culprits behind irrational choices. If they’re overactivated, as
can occur when they’re bathed in hormones, “then investors will display
the irrational behavior often observed in real markets,” warn the
scientists. “If testosterone continued to rise or became chronically
elevated, it could begin to have the opposite effect on [profits and
losses] . . . because testosterone has also been found to lead to
impulsivity and sensation seeking [and] to harmful risk taking.”
The traders’ cortisol levels might also lie behind one of the U.S.
stock market’s recent tendencies: once it starts to fall, especially at
the end of the trading day, it often falls off the cliff. There you
are, checking the Dow at 3:45, and see it’s down a couple dozen
points—only to find when you check back after the close that it
plummeted 200 points. Blame cortisol. It makes people more risk-averse,
so in a slightly-down market men with soaring cortisol will “exaggerate
the market’s downward movement,” the scientists warn, by selling like
crazy.
There are also risks on the upside. Testosterone rises in a bubble.
Since it also increases risk taking and irrationality, high levels in
traders can exaggerate market rises. Hence the roller-coaster: every
bit of news, good or bad, has an exaggerated effect on financial
markets.
As Herbert puts it in a statement, “Our work suggests that
[financial] decisions may be biased by emotional and hormonal factors.”
And this, from Coates (an ex-trader himself): “If testosterone reaches
physiological limits, as it might during a market bubble, it can turn
risk-taking into a form of addiction, while extreme cortisol during a
crash can make traders shun risk altogether. In the present credit
crisis traders may feel the noxious effects of chronic cortisol
exposure and end up in a psychological state known as ‘learned
helplessness.’ If this happens central banks may lower interest rates
only to find that traders still refuse to buy risky assets.” ”
Sound like any market conditions you know?
Scientists have not done a comparable study on female traders, who
are rarer than hens’ teeth. But the implication is clear. Men are just
too hormonal for the public to entrust them with something as crucial
as the global financial system. Their raging hormones will be the ruin
of us all.