Market participants aren’t the rational automatons of most financial theory. They are biological organisms responding with a neural and physiological apparatus designed millions of years ago. If what happens in markets affects hormones, these in turn alter behavior and feed back into the markets.
n=17 traders on the trading floor of a major investment bank in London
8 days in row collected two saliva samples per subject
timing of samples: 11am and 4pm, before and after main trading activity
measured testosterone, adrenaline and cortisol
no obvious change in appearance of subjects
High T increases persistence in a search and fearlessness, and reduces risk aversion
Athletes before competition have higher T
"Winner effect" in animals (lions, bears, humans)
= after a competition the winner experiences a T surge, looser levels sink
makes sense because looser goes into recovery mode whereas winner may need to defend title
can cause trouble because serial winner may take unnecessary risks
(football player rapist thoughts)
higher morning T-->better market performance
Proposed mechanism: T-->increased hemoglobin (how quickly does this work?)
Cortisol increases relative to volatility of trading, but not due to losses
Of the 17 (assuming all men) sampled, when ordered by average testosterone levels, was there a correlation with market performance? Can T levels be too high for optimal performance? What about T levels in women? Is there a followup study??
PROJECTING TO WALL ST (theory)
winner effect-->foolish investing?
long bull market-->giddy energy, aggressive excitement-->could drive financial bubbles
burst bubble-->long term cortisol elevations-->irrational risk aversion
As much as traders and investors try to remain rational, will power is no match for steroids that work their effects in every single cell in the body.
author of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You
Bloomberg View columnist