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Last Updated: Jun 30, 2008 - 11:14:37 AM |
MONDAY April 14, 2008 (foodconsumer.org) -- High testosterone can not only affect sexual performance, but also determine the return for your investment in the stock market, according to a new study by researchers at the University of Cambridge.
The study showed traders who had high levels of testosterone in the morning tended to make more than average profits for the rest of that day.
The researchers hypothesized that high testosterone increases confidence and appetite for risk - qualities that would augment the performance of any trader who had a positive expected return.
This theory of testosterone and trading performance may also explain why people caught up in bubbles and crashes often find it hard to make rational choices, unintentionally exacerbating financial crises.
Testosterone is a steroid hormone that is known to affect sexual behavior and control competitive encounters. The hormone will rise prior to a competition and rise even more in a winning athlete while a losing one will only see the hormone declining.
The increase of testosterone boosts the winner's confidence and risk taking and increase odds of winning again, a phenomenon known as the 'winner effect'. But too much testosterone can make a man less capable of assessing risk rationally.
For the study, the researchers followed male traders in 17 City of London for eight consecutive business days. Saliva samples were taken twice a day, at 11.00 a.m. and 4.00 p.m. times that fell before and after the bulk of the day's trading to measure the hormones.
Traders recorded their profit and loss. Previous performance of the traders was used to estimate their daily average.
Daily testosterone levels were found significantly higher on days when traders made more than their one-month daily average compared to days when the levels were lower.
But if testosterone continued to rise or remained at an elevated level, a trader would increase risk-taking to unprofitable levels.
Earlier studies showed injected testosterone leads to irrational decision-making because the researchers believed high levels of the hormone could lead to a high level of behavior such as impulsivity, sensation seeking, harmful risk taking or even euphoria and mania.
This means the winner effect may also lead to increased and eventually irrational, risk taking in the next round trading.
Professor Joe Herbert, Cambridge Centre for Brain Repair, said "Our work suggests that these decisions (in the highly demanding environment) may be biased by emotional and hormonal factors that have not so far been considered in any detail."
"Any theory of financial decision-making in the highly demanding environment of market trading now needs to take these hormonal changes into account. --- Hormones may also be important for determining how well an individual trader performs in the highly stressful and competitive world of the market."
The researchers also found another hormone cortisol in the traders responded to the variance of the market. Traders raised the level of cortisol when the market displayed a higher volatility and increased odds of making money that is associated with higher volatility.
But the researchers suggested that the rising cortisol may reduce a trader’s appetite for risk and offset the effect of testosterone, which boosts his risk taking.
Dr. John Coates, lead author of the study, said, "Rising levels of testosterone and cortisol prepare traders for taking risk. However, 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."
Coates, a former trader, continued, "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. At times like these economics has to consider the physiology of investors, not just their rationality."
© 2004-2008 by foodconsumer.org unless otherwise specified
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