Hormones might be driving factors behind market volatility: study

Researchers found that hormones such as testosterone and cortisol might cause traders to take more risks, which could lead to destablizing markets, according to a study published Thursday by the Imperial College London.

Cortisol is elevated in response to physical or psychological stress, increasing blood sugar and preparing the body for a fight-or-flight response. Meanwhile, previous studies have shown that men with higher testosterone levels are more likely to be confident and successful in competitive situations.

The researchers said the stressful and competitive environment of financial markets might promote high levels of cortisol and testosterone in traders.

To calculate the effects of these hormones on trading, researchers simulated the trading floor in the lab by having volunteers buy and sell assets among themselves.

In one experiment, the researchers measured levels of the two hormones in saliva samples of 142 volunteers, male and female, playing an asset trading game in groups of around 10 participants.

The results showed that those who had higher levels of cortisol were more likely to take risks, and high levels in the group were associated with instability in prices.

In a follow-up experiment, 75 young men were given either cortisol or testosterone before playing the game, once with the hormone and once with a placebo.

Both hormones encouraged traders to shift investment towards riskier assets, with cortisol appearing to directly affect volunteers' preference for riskier assets, while testosterone seemingly increased optimism about how prices would change in the future, according to the study.

"The results suggest that cortisol and testosterone promote risky investment behavior in the short run," said Dr. Ed Roberts, one of the lead authors of the study, from Imperial College London.

Economists have long recognized that the unpredictability of human behavior can make financial markets unstable.

John Maynard Keynes wrote of "animal spirits" and Alan Greenspan and Robert Shiller alluded to "irrational exuberance" as a possible cause of overvaluations in asset markets. However, scientists have only recently begun to explore the physiological basis for this phenomenon.

"We only looked at the acute effects of the hormones in the lab. It would be interesting to measure traders' hormone levels in the real world, and also to see what the longer term effects might be," said Roberts.

The study has been published in the journal Scientific Reports. Endit