Scientists at Cambridge University wondered to what extent hormones might influence investment decisions, so during a week full of earnings and government reports they studied testosterone and cortisol levels for “noise traders” at a major London brokerage firm to determine the extent to which they correlated to trading activities and results. Noise traders profit from market “noise” or disequilibriums, making even seconds-long trades to take advantage of small variations in stock prices. Their trades risked up to $2 billion at a time.
The scientists wanted to know whether testosterone and cortisol may contribute to the irrational bubbles and busts of market behavior.
According to an April 18th WSJ article (subscription may be required), researchers wanted to determine the extent of, “…the ‘winner’s effect,’ in which successive victories boost levels of testosterone higher and higher, until the winner is drunk with success — so overconfident that he can no longer think clearly, assess risk properly or make sound decisions.
‘I wondered whether the same thing was happening on Wall Street,’ said Dr. Coates. Too much testosterone might make traders foolishly overconfident, exaggerating a market’s rise. Too much cortisol, secreted in response to stress, might in turn make them overly shy of risk, making a market’s downward slide even more precipitous.”
The results: 82% of traders with high morning testerone levels made more money than usual. And those with high cortisol (stress) levels did not fare as well. “We actually think this molecule (testosterone) is destabilizing risk-taking,” Dr. Coates said, “rather than optimizing it.”