Study ties irrational trading with too much testosterone

CHICAGO — Economic observers long puzzled by the seemingly unpredictable and irrational movements of the market may have a new, very human factor to consider: hormones.

In a study to be published today in the journal Proceedings of the National Academy of Sciences, two British researchers have found that market fluctuations affect — and may be affected by — hormones associated with stress, sexual development and aggression. High levels of testosterone in the morning predicted higher profits that day, while volatile days on the market led to increases in the stress hormone cortisol.

The findings suggest that hormones may influence people's financial decisions and even explain the irrational group behavior associated with market bubbles and crashes. They also raise the possibility that the next competitive arena to suffer a steroid scandal could be Wall Street.

The study's lead author, John Coates, a senior research fellow at Cambridge, was inspired to seek a link between hormones and trading after observing the strange behavior of traders during the 1990s dot-com boom, when he was a derivatives trader at Deutsche Bank in New York.

"I began to think that the people involved in this insanity were under the influence of some drug," Coates said. "When it was all over, they were like people in a hangover. They couldn't believe they had bought some Net company with no earnings, no interest plan, and lost all of their savings."

Coates wondered whether testosterone, a hormone known to rise during competition in both animals and humans, could affect trading behavior, causing men to trade more aggressively. Indeed, the study, which measured hormone levels twice a day for two weeks in 17 London options traders, found that traders produced larger average profits on days when their testosterone was elevated in the morning.

That result might suggest to some traders that they should follow the lead of some athletes and seek a competitive edge through steroid hormones, an idea Coates finds "terrifying."

But his co-author, Cambridge professor of neuroscience Jim Herbert, said that it would be difficult for traders to adjust their hormones for an advantage on the market, and that too much testosterone would lead to irrational risk taking.

"If you could determine your optimal level of testosterone or cortisol as a trader ... you could theoretically adjust them to what they should be," Herbert said. "However, you would never know that."

The authors also found that days of high market volatility produced increases in cortisol. High levels of cortisol would be expected to reduce risk-taking in humans, which can prolong market downturns like the one currently haranguing world markets.

"Cortisol goes up with uncertainty and volatility in the market, and both of those numbers have lately gone off the charts — not for a short period of time but for six months," Coates said. "Those effects would cause you to not take risks, and to see danger everywhere."

"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," Coates said.

The findings could dramatically rewrite the way economists model human behavior when it comes to financial decisions, Coates said.

"If there's a biological element to financial life, we have to start building different kinds of models and thinking about policy in a different way," Coates said. "It's proof to me we're dealing with a biological organism rather than a computer."

Material from The Associated Press was used in this story.