Economists have recognized that the unpredictability of human behavior can make financial markets unstable. However, researchers have only recently begun to explore the physiological basis for this phenomenon. They have now found that the hormones testosterone and cortisol may spur traders to undertake more risks, thereby hiking the risk of destabilization of financial markets.
The researchers suggest that the stressful and competitive environment of financial markets may promote high levels of cortisol and testosterone in traders. Cortisol is elevated in response to physical or psychological stress, increasing the blood sugar level and preparing the body for a fight-or-flight response. Previous studies have also shown that men with higher testosterone levels are more likely to be confident and successful in competitive situations.
Lead author Dr. Ed Roberts from department of medicine at Imperial College London said, "Our aim is to understand more about what these hormones do. Then we can look at the environment in which traders work, and think about whether it is too stressful or too competitive. These factors could be affecting traders' hormones and having an impact on their decision-making."
Researchers simulated the trading floor in the laboratory by having volunteers buy and sell assets among themselves. They measured the volunteers' natural hormone levels in an experiment and artificially raised them in another one. When given doses of either hormone, the study volunteers invested more in risky assets.
Co-lead author Carlos Cueva from department of economics at the University of Alicante said, "Our view is that hormonal changes can help us understand traders' behavior, particularly during periods of financial instability."
The study findings suggest that cortisol and testosterone promote risky investment behavior in the short run, and these findings should be considered by policymakers looking to develop more stable financial institutions.
The study is published in the Scientific Reports.