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But what seems to start out well can turn bad, with elevated testosterone levels over several days possibly leading to irrational risk-taking, according to researchers at the University of Cambridge in Britain.
"If people want to get practical, it would be good for both banks and the financial system as a whole if we had more women and older men in the markets," said John M. Coates, lead author of a study appearing in the Proceedings of the National Academy of Sciences.
Such a change would produce a much more stable financial system, said Coates, a research fellow in the university's department of physiology, development and neuroscience.
Saliva samples of London traders
Coates and Joe Herbert studied male financial traders in London, taking saliva samples in the morning and evening. They found that levels of two hormones, testosterone and cortisol, affected traders.
Those with higher levels of testosterone in the morning were more likely to make an unusually big profit that day, the researchers found. Testosterone, best known as the male sex hormone, affects aggression, confidence and risk-taking.
Cortisol is tied to uncertainty, novelty and unpredictability, "which pretty much describes a trader's life," Coates said.
Coates and Herbert's study comes less than two weeks after US researchers reported that young men shown erotic pictures were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler.
What the study revealed
Money and women trigger the same brain area in men, those
researchers said. One member of that team, Camelia Kuhnen, an assistant professor at the Kellogg School of Finance at Northwestern University, said Coates and Herbert's findings "are very interesting and they help support the claim that emotion influences financial decisions."
But she cautioned that the findings don't prove a causal link between testosterone and profitability. Kuhnen, who was not part of Coates and Herbert's team, termed the idea that long-term high testosterone levels can lead to irrational risk-taking "an interesting hypothesis."
Coates said he worked as a Wall Street trader during the dot.com bubble in the 1990s when millions of dollars were invested in new Internet companies, many of which later collapsed. He said trader behaviour he observed didn't make sense in terms of economic or game theory, "everyone seemed to be on a drug".
He added that even in airport bars the crowd would be ignoring baseball to watch and cheer financial reports on television. That prompted him to begin a study of the behaviour, which didn't seem to affect women.
High hormone levels in 'winners'
In hormone research there is the "winner model," based on both human and animal activity, in which competitors have rising testosterone levels. When one wins, his hormone levels increase even more, while they fall in the loser.
That can give the winner an advantage in aggression and risk-taking in the next competition, a positive feedback, he explained. But after a while the effect overreaches and the male begins making stupid decisions.
"I wondered if that was what was going on in the financial markets," he said.
The London study indicated that hormone levels in the traders were both responding to financial events and influencing them.
Their conclusion was that "Cortisol is likely, therefore, to rise in a market crash and, by increasing risk aversion, to exaggerate the market's downward movement. Testosterone, on the other hand, is likely to rise in a bubble and, by increasing risk taking, to exaggerate the market's upward movement."
And that, Coates and Herbert wrote, "may help explain why people caught in bubbles and crashes often find it difficult to make rational choices." – (Sapa)
April 2008
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