Trading bubbles and busts: a chemical explanation?

trader_testosterone Easy on the ‘roids, buddy. (Photo by Scott Olson/Getty Images)

A study from the University of Cambridge’s department of physiology suggests there may be a biological reason behind the success and failure of financial traders.
The study, to be published in the Proceedings of the National Academy of Sciences, found high testosterone levels in traders in the morning were a predictor of financial success that day. High levels of another steroid, cortisol, accompanied times of financial uncertainty and could actually encourage negative attitudes during losses that could lead to further losses.
Researchers J.M. Coates and J. Herbert studied several male traders over eight days. The study used a group of financial traders in London who were mainly trading in German markets, particularly interest rate futures (although the study implies this could just as well have been a group of energy traders). Testosterone and cortisol readings were taken in the morning and afternoon (via saliva) and matched to the trader’s results.
The high testosterone at the beginning of the day seemed to be due to a positive-feedback loop called the “winner effect,” where essentially past success gets one to anticipate and work toward further success.

When traders in our study experienced acutely raised testosterone, for example, they made higher profits, perhaps because testosterone has been found, in both animal and human studies, to increase search persistence, appetite for risk, and fearlessness in the face of novelty , qualities that would augment the performance of any trader who had a positive expected return.

So, should testosterone-laced coffee creamers be put in all the office percolators? Maybe not.

However, if testosterone continued to rise or became chronically elevated, it could begin to have the opposite effect on P&L and survival, because testosterone has also been found to lead to impulsivity and sensation seeking, to harmful risk taking, and, among users of anabolic steroids, to euphoria and mania.”

And too much cortisol can have the effect of “promoting a selection attention to mostly negative precedents… and produce a tendency to find threat and risk where none exist.”

Cortisol is likely, therefore, to rise in a market crash and, by increasing risk aversion, to exaggerate the market’s downward movement. Testosterone, on the other hand, is likely to rise in a bubble and, by increasing risk taking, to exaggerate the market’s upward movement.”
“These steroid feedback loops may help explain why people caught in bubbles and crashes often find it difficult to make rational choices.

So, are we really in an economic downturn or have we fallen victim to the chemically-induced behavior of the trading community? What do you think?