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Traders' Hormones May Destabilize Financial Markets, Study Reveals

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Traders working in financial markets - traditionally younger men - could be the victims of their hormones, with testosterone pushing them to take extreme risks that could create financial instability, a study suggests.

Testosterone and cortisol, hormones more prevalent in younger men, can push them into taking risks and to go on taking more risks once they've had some successes, possible resulting in winning streaks but just as possibly causing crashes, researchers at Imperial College London say.

Financial market trading "is very dominated by young men, which is an unusual subset of people," says researcher Ed Roberts. "It's a higher testosterone group, a very competitive group. Do they perform as rationally as they would if they were in a group that's mixed? The social environment has such a big role in people's behavior."

To test that hypothesis, the researchers administered either hormones or placebos to a group of young male test subjects, then instructed them to make simulated investment decisions.

Those given cortisol made risker decisions while those given testosterone felt they were on a winning streak, the researchers report in the journal Scientific Reports.

Such perceived winning streaks could push traders to "irrational exuberance" that can result in a crash, Roberts argues.

Hormone levels can be elevated by the stressful and highly competitive working environment of financial markets, with a resultant effect on decision-making, the researchers note.

That working environment is key in its impact on traders, Roberts suggests.

"They are like elite athletes - they need to be looked after," he says.

The new study is in line with previous research suggesting men are more likely to consider taking risks than women are, the researchers say.

Cortisol levels increase during psychological or physical stress and prepare the body for a "fight or flight" response. High testosterone levels have been shown to make men confident and successful in competitive situations.

"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," researchers say. "Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behaviour, acting via different behavioural pathways."

In fact, in another experiment the researchers assembled a group of 142 volunteers, male and female, and had them play a simulated trading game.

Higher levels of cortisone were found in men taking risks that tended to result in instability in prices in the game, while no such effect was seen in the women, the researchers found.

The finding was consistent with other studies suggesting women respond to stress in different ways, they say.

Roberts says the study only looked at hormone levels in a laboratory environment, suggesting further research might yield more insights.

"It would be interesting to measure traders' hormone levels in the real world, and also to see what the longer term effects might be," he says.

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