Male Sex Hormone May Boost Financial Traders Success, at Least in Short Run
Monday, April 14, 2008                14:57 EDT

WASHINGTON, D.C.  --  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.

"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 dot.com 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."

___

On the Net:

PNAS: http://www.pnas.org

___ Blue Wave/QWK v2.12