Hormones apparently have crucial impacts on the financial markets. Researchers of a new study have found that testosterone and cortisol have an effect on how traders take risks that can destabilize markets.
For the new study, which was published in Scientific Reports on July 2, Ed Roberts, from Imperial College London's Department of Medicine, and colleagues simulated the trading floor by involving volunteers to buy and sell assets among themselves.
The researchers measured the natural hormone levels of the study participants as well as artificially raise the hormone levels in another. They found that the volunteers were more likely to invest in risky assets when they are given doses of either cortisol or testosterone.
The two hormones, which are prevalent in young men, can cause young men on trading desks to take more financial risks and keep taking them when they had success.
"We found that both cortisol and testosterone shifted investment towards riskier assets. Cortisol appears to affect risk preferences directly, whereas testosterone operates by inducing increased optimism about future price changes," the researchers reported in their study. "Changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behavior, acting via different behavioral pathways."
The researchers think that the high level of cortisol and testosterone in traders has something to do with the competitive and stressful environment of financial markets. Earlier studies have found that men with higher levels of testosterone tend to be confident and competitively successful.
Cortisol, on the other hand, is increased when a person experiences stress and prepares the individual for a fight or flight response.
The researchers said that the changes in hormone levels can shed more light on understanding the behavior of traders particularly during times of financial instability.
"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," Roberts said adding that these factors could have an effect on the hormones of the traders and influence their decision-making.
Roberts said that the results of their study suggest that testosterone and cortisol stimulates risky investment behavior at least in the short term. He said that it will be interesting to look at the hormone levels of real world traders to better understand the long term effects of these hormones.
Photo: Perpetual Tourist | Flickr