Raging Hormones

If a stock market that swings 400 or more points in a single session has been making you queasy—not to mention too terrified to check your 401(k) balance—at least we now know who to blame: men and their raging hormones.

It’s a Wall Street cliché that the most successful traders are those with nerves of steel and you-know-whats the size of softballs. Scientists from the University of Cambridge therefore decided to measure what, exactly, is going on with traders’ testosterone (which is linked to the latter) and cortisol, the stress hormone. What they found, as they report in this week’s online edition of the Proceedings of the National Academy of Sciences], is that when male traders have high levels of testosterone in the morning, they make more profits than their daily average that day, and when market volatility is high their cortisol levels soar. Since both hormones are well-known to impair thinking, the scientists warn, high levels can make traders “display the irrational behavior often observed in real markets,” make traders take more risks, and exaggerate downturns in the market.

Sound familiar?

For their study, Cambridge’s John Coates and Joe Herbert recruited 17 traders, all men working for a financial firm in London. Most of the traders in the study, who were 18 (!; that’s not a typo) to 38 years old, focused on German interest-rate futures, making trades valued at £100,000 to £500 million, or about $196,000 to $980 million. For eight business days in a row, the traders gave the scientists saliva samples, from which the researchers measured levels of testosterone and cortisol.

Tons of studies on testosterone have shown that this “male” hormone (that’s in quotes because women have some, too) rises in athletes preparing for a competition, spikes even more in winning athletes and falls in losers. Testosterone seems to increase both confidence and risk taking. That can increase the chance of winning again.

That seemed to be what happens with the traders. Daily testosterone levels were significantly higher on days when they made especially high profits on their transactions, Coates and Herbert find. How? Because, according to other studies, high testosterone levels have been found to make men “increase search persistence” (that is, you keep looking for information of the wisdom of a trade), take greater risks (which can be a winning strategy if you usually make profitable trades) and display “fearlessness in the face of novelty,” such as when unexpected news hits the markets.

As for cortisol, it seemed to reflect how volatile the German market was: dizzying swings stressed out the traders. No surprise there.

But perhaps some red flags. Levels of both hormones were high enough to have cognitive and behavioral consequences, “specifically by shifting risk preferences or disturbing the neural basis for rational choice,” write the scientists. Exactly how this happens is the subject of intense research. But what neuroscientists know is that a handful of brain regions—the amygdala, anterior insula and nucleus accumbens—are the culprits behind irrational choices. If they’re overactivated, as can occur when they’re bathed in hormones, “then investors will display the irrational behavior often observed in real markets,” warn the scientists. “If testosterone continued to rise or became chronically elevated, it could begin to have the opposite effect on [profits and losses] . . . because testosterone has also been found to lead to impulsivity and sensation seeking [and] to harmful risk taking.”

The traders’ cortisol levels might also lie behind one of the U.S. stock market’s recent tendencies: once it starts to fall, especially at the end of the trading day, it often falls off the cliff. There you are, checking the Dow at 3:45, and see it’s down a couple dozen points—only to find when you check back after the close that it plummeted 200 points. Blame cortisol. It makes people more risk-averse, so in a slightly-down market men with soaring cortisol will “exaggerate the market’s downward movement,” the scientists warn, by selling like crazy.

There are also risks on the upside. Testosterone rises in a bubble. Since it also increases risk taking and irrationality, high levels in traders can exaggerate market rises. Hence the roller-coaster: every bit of news, good or bad, has an exaggerated effect on financial markets.

As Herbert puts it in a statement, “Our work suggests that [financial] decisions may be biased by emotional and hormonal factors.” And this, from Coates (an ex-trader himself): “If testosterone reaches physiological limits, as it might during a market bubble, it can turn risk-taking into a form of addiction, while extreme cortisol during a crash can make traders shun risk altogether. In the present credit crisis traders may feel the noxious effects of chronic cortisol exposure and end up in a psychological state known as ‘learned helplessness.’ If this happens central banks may lower interest rates only to find that traders still refuse to buy risky assets.” ”

Sound like any market conditions you know?

Scientists have not done a comparable study on female traders, who are rarer than hens’ teeth. But the implication is clear. Men are just too hormonal for the public to entrust them with something as crucial as the global financial system. Their raging hormones will be the ruin of us all.