British study links market fluctuations, hormones

Economic observers long puzzled by the seemingly unpredictable and irrational movements of the market may have a new, very human factor to consider: hormones.

In a study to be published today in the journal Proceedings of the National Academy of Sciences, two British researchers have found that market fluctuations affect – and may be affected by – hormones associated with stress, sexual development and aggression. High levels of testosterone in the morning predicted higher profits that day, while volatile days on the market led to increases in the stress hormone cortisol.

The findings suggest that hormones may influence people’s financial decisions and even explain the irrational group behavior associated with market bubbles and crashes.

The study’s lead author, John Coates, a senior research fellow at Cambridge, was inspired to seek a link between hormones and trading after observing the strange behavior of traders during the 1990’s dot-com boom.

“I began to think that the people involved in this insanity were under the influence of some drug,” Coates said.

Coates wondered whether testosterone, a hormone known to rise during competition in both animals and humans, could affect trading behavior, causing men to trade more aggressively. Indeed, the study, which measured hormone levels twice a day for two weeks in 17 London options traders, found that traders produced larger average profits on days when their testosterone was elevated in the morning.

That result might suggest to some traders that they should follow the lead of some athletes and seek a competitive edge through steroid hormones, an idea Coates admitted he finds “terrifying.”

But his co-author, Cambridge professor of neuroscience Jim Herbert, said that it would be difficult for traders to adjust their hormones for an advantage on the market, and that too much testosterone would lead to irrational risk taking.

The authors also found that days of high market volatility produced increases in cortisol. High levels of cortisol would be expected to reduce risk-taking in humans, which can prolong market downturns like the one currently haranguing world markets.