Trading on testosterone

Take with boulder-sized grain of salt. Cause and effect? Only an eight day interval? Couldn't that have been an exceptional period over which aggressiveness paid off?

NYTimes: MOVEMENTS in financial markets are correlated to the levels of hormones in the bodies of male traders, according to a study by two researchers from the University of Cambridge (newscientist.com).

John Coates, a research fellow in neuroscience and finance, and Joe Herbert, a professor of neuroscience, sampled the saliva of 17 traders on a stock trading floor in London two times a day for eight days. They matched the men’s levels of testosterone and cortisol with the amounts of money the men lost or won on the markets. Men with elevated levels of testosterone, a hormone associated with aggression, made more money. When the markets were more volatile, the men showed higher levels of cortisol, considered a “stress hormone.”

But, as New Scientist asked, “which is the cause and which is the effect?”

According to the researchers’ analysis, the men who began their workdays with high levels of testosterone did better than those who did not.

“The popular view is that experienced traders can control their emotions,” Mr. Coates told New Scientist. “But, in fact, their endocrine systems are on fire.”

As with anything else, when it comes to hormones, it is possible to have (from a trader’s perspective) too much of a good thing. Excessive testosterone levels can lead a trader to make irrational decisions.

New Scientist pointed out that although cortisol can help people make more rational decisions during volatile trading periods, too much of it can lead to serious health problems like heart disease and arthritis, and, over time, diminish brain functions like memory.

If individual traders are affected by their hormone levels, does the same hold true for the markets as a whole? After all, the market is nothing more than an aggregate of the individual actions of traders. Mr. Coates thinks it is possible that “bubbles and crashes are coming from these steroids,” according to New Scientist.

If so, “central banks may lower interest rates only to find that traders still refuse to buy risky assets.”

Perhaps, he told New Scientist, “if more women and older men were trading, the markets would be more stable.”