Hormones may have a major effect on financial markets. A new study shows that traders’ hormone levels are higher in their competitive, stressful environments, and they can cause them to make riskier investments that can destabilize markets.
The study, published in Scientific Reports, revealed that when the participants were given doses of either testosterone or cortisol, they invested in riskier assets. The participants were buying and selling assets among each other.
In one run, scientists measured the participants’ natural hormone levels using saliva samples. Roughly 142 volunteers–men and women–played a trading game in groups of ten.
Researchers found that participants with higher cortisol levels were more likely to take risks. The higher levels were also linked to instability in prices.
And in another experiment, 75 men were given testosterone or cortisol before playing the trading game. Researchers found that both had an affect on larger risk-investments.
Additionally, testosterone seemed to increase optimism in future price changes. And cortisol was associated with participants’ preference to high-risk assets.
Cortisol is raised in response to psychological or physical stress. It increases blood sugar and prepares the body for a fight or flight response, as reported by Medical News Today.
One of the lead authors of the study from the department of economics at the University of Alicante, Spain Carlos Cueva said that the changes in hormone levels can aid in understanding traders’ behavior. He added that this is particularly helpful “during periods of financial instability,” Clapway reports.
The authors suggest that the results of the study could aid in creating more stable financial institutions. The conclusion of the paper states that changes in testosterone and cortisol could “play a destabilizing role in financial markets through increased risk taking behavior, acting via different behavioral pathways.”
Another lead author Ed Roberts said that “our aim is to understand more about what these hormones do.” He added that the results of the study suggest cortisol and testorsterone stimulate risky behavior in the short term at least.
