Juan Toro

A recent study by a Cambridge researcher –John Coates- published in the proceedings of the National Academy of Science points out that the level of hormones could have an effect in risk taking /risk aversion by economic agents. The study brings neuroscience and endocrinology to the main agenda of research in finance. Mr. Coates suggests that the level of two steroids (testosterone and cortisol) affects people’s mood, memories and behavior. High levels of testosterone can increase confidence and risk taking attitudes-inducing a winning effect-, but once it passes a threshold it can have an opposite effect on success (and risk taking becomes irresponsible and dangerous). This behavior has been shown in animal where a high level of testosterone guarantees survival but too much can induce a war of attrition.
Mr. Coates has analyzed this hypothesis in a group of trader in the City of London. He sampled testosterone and cortisol from a group of 17 male traders and related it with daily performance. He finds out that high levels of testosterone is positively correlated with above average levels of profits. Reasonable testosterone levels induce good risk taking habits. But too much of it induces irresponsible trading decisions. He also finds out that the level of cortisol is highly correlated with the variance of traders’ profits. Cortisol induces feeling of anxiety and fantasying with non existent danger outcomes, making traders irrationally risk averse. Mr. Coates even suggests that high levels of cortisol are related with unsounded sell offs in some markets.

Because these steroids are found in different levels in males and females he suggests that changing the composition of trading desks and bringing more females to a currently male dominated environment can change the risk return profile of banks. The endocrine profile of a trading desk can be improved though the right mix of males and females.

This is a nice well documented story. May be just the start of a new field contributing to the understanding of swings and overreactions in financial markets.

Posted on 16 Abril 2008 in Financial Markets

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