Market bubbles and busts get blamed on a lot of things, but new research shows hormones may exacerbate the extremity of swings.
University of Cambridge researchers have discovered a link between daily profits and morning testosterone levels. They followed City of London traders through their days on the trading floor, occasionally stopping to swab a quick saliva sample.
The resulting paper, "Endogenous Steroids and Financial Risk Taking on a London Trading Floor," shows that higher levels of early-morning testosterone equaled better-than-average daily profits.
A second test for cortisol, a hormone that increases with stress, showed a pickup along with market volatility.
Together, the two act as internal balances for risk-taking behavior. But researchers speculate that too much testosterone, already shown to produce irrational risk-taking at extreme levels, could prompt traders to take impulsive actions. The "winner effect" produced by past success could be a trap when it comes to overconfidence in future trading.
John Coates, lead author of the study, says a surge in testosterone can turn an appetite for higher risk into an irrational addiction. At the same time, a cortisol surge can make traders risk-averse in the extreme.
It might be a good time to call your broker, just to ask how he's feeling.