Male Sex Hormone May Affect Stock Trades: Study

The hormone that drives male aggression and sexual interest also seems able to boost short term success at finance. 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 England.

NYSE traders
NYSE traders

"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 this week's issue of 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.

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 in a telephone interview.

Coates and Herbert's study comes less than two weeks after U.S. 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.

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 bubble in the 1990s when millions of dollars were invested in new Internet companies, many of which later collapsed.

He said trader behavior he observed didn't make sense in terms of economic or game theory, "everyone seemed to be on a drug."

Even in airport bars the crowd would be ignoring baseball to watch and cheer financial reports on television, Coates said.

That prompted him to begin a study of the behavior, which didn't seem to affect women.

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:

"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."