If your broker had a fight with his wife before work this morning he may be making risky bets with your money, predicts a new study reported in Scientific Reports.
Researchers started with the premise that work in the stock market is “highly stressful and competitive” but they carried that further to postulate whether variations in the hormone levels of cortisol and testosterone could extrapolate effects on trading behaviors of enough significance to impact the overall market. They designed a study controlled for learning and price expectations which would measure risk-taking in quick decision models centered on price movements.
In a press release, co-author Carlos Cueva, economics professor at the Universidad de Alicante in Spain, explained, “Our view is that hormonal changes can help us understand traders’ behavior, particularly during periods of financial instability.”
Young male study participants were injected with hormones: either cortisol– the stress fight or flight hormone– or testosterone. They then engaged in a simulated trading game complete with monetary incentives.
The study results showed that male participants injected with cortisol had a substantially stronger trading activity level. Moreover, both cortisol and testosterone injection recipients were more likely to trade in stocks with wider price swings. Higher risk taking was defined by the researchers as placing larger investments on riskier stocks.
Consequently, researchers surmised the study showed subjects moving towards riskier assets. “Cortisol appears to affect risk preferences directly, whereas testosterone operates by inducing increased optimism about future price changes.”
Acknowledging further research is needed to confirm and expand the results, the researchers speculated on how much the trader’s decision making were directly leading to riskier behavior: “Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk-taking behavior, acting via different behavioral pathways.”
“Our aim is to understand more about what these hormones do,” Ed Roberts, PhD, said in the release. Dr. Roberts is affiliated with the Division of Brain Sciences and the Department of Medicine at the Imperial College in London.
