Testosterone May Drive Traders to Risks, Riches (Update1)
By Lisa Rapaport
April 14 (Bloomberg) -- Traders who start the morning with high levels of the hormone testosterone, produced in the testes, will probably make more money that day, a study found.
Testosterone creates feelings of confidence and encourages risk-taking that can lead to profit, while another hormone, cortisol, prompts risk aversion when markets are volatile, according to a two-week study of 17 London traders published today in the Proceedings of the National Academy of Sciences.
In traders on a winning streak, testosterone will keep rising until the hormone eventually causes manic, irrational behavior, turning the boom into a bust, said study author J.M. Coates, a derivatives trader at Deutsche Bank in New York from 1996 to 2001, during the dot-com bull market.
``I became curious about people's behavior during the dot- com bubble because I didn't think you could explain that market with standard economics,'' said Coates, now a professor at the Judge Business School at the University of Cambridge in England. ``It seemed like the effects of a drug, and women didn't seem to be affected by it.''
In today's volatile market, uncertainty will lead to a buildup of cortisol in traders, eventually causing them to perceive danger where none exists, Coates said.
``It's like when you watch a horror movie and the uncertainty about where you're going to see the alien on the ship is a lot scarier than when it actually pops up somewhere,'' Coates said, describing the impact of cortisol.
The hormonal impact on trading behavior may undercut monetary policies designed to curtail an outsized bull or bear market, Coates said. ``This study tells us we need to account for biology to take effective action.''
Risk-Taking and Riches
The study measured traders' hormone levels several times throughout every day for two weeks. Traders with the highest testosterone levels first thing in the morning had the greatest profits.
Traders hyped up on testosterone may take more risks without greater financial success, said Jay Shartsis, director of options trading at R.F. Lafferty & Co. in New York, in an interview about the study. ``Trading and investing are predicated on not taking large risks but doing it in measured stages.''
Risk and profit don't go necessarily hand in hand, said Randy Frederick, director of derivatives at Charles Schwab & Co. in Austin, Texas, in an interview. If testosterone leads to greater risk-taking, ``it means you make more when you win and lose more when you don't.''
``Testosterone I don't think is going to give you a sharpened intellect or better judgment, but if it gives you less inhibition so you can take bigger risks it will pay off nicely when things go well,'' Frederick said.
To contact the reporter on this story: Lisa Rapaport in New York at [email protected]
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