How Hormones Influence the Stock Market

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Traders work on the floor of the New York Stock Exchange shortly before the closing bell on June 29, 2015. New research suggests elevated levels of cortisol and testosterone may compel traders to make riskier investment decisions. REUTERS/Lucas Jackson

The financial market’s ebb and flow may be influenced by the endocrine systems of stock traders. According to a new study, elevated levels of cortisol and testosterone may compel traders to make riskier investments.

A large body of research has linked these two hormones to changes in human behavior. Elevated testosterone is linked with aggression, risk-taking and even an inflated sense of self. The hormone also compels a person to seek out competition. Elevated cortisol may simply be an occupational hazard for traders, since levels of this particular hormone tend to rise in response to physical or psychological pressure. Cortisol, known as the stress hormone, also plays a role in the human “fight or flight” response.

Previous studies have looked at the impact of testosterone on Wall Street and found that traders’ profits rose on days when their morning testosterone levels were higher than average, but also that the market was more volatile on days when traders’ cortisol levels spiked. The latest research focuses on the connections between the two hormones and decision making and motivation in a stock-trading scenario.

"Numerous reasons have been proposed to explain why financial markets undergo periods of instability. These include: debt accumulation, incorrect beliefs about earnings process, limits to arbitrage, asset incompleteness, herding, or momentum trading," the researchers at Imperial College London write in their study. "Yet influential economists still recognize the key role played by the unpredictability of human motivation."

The findings, published in Scientific Reports, tested out the theory with two separate but related studies set up to simulate a trading floor. In both studies, the researchers showed price sequences for two fake stocks to each participant, who was then asked to determine which would be a better investment, enter an investment amount for the stock, enter an investment amount for the alternate stock and provide a projection for subsequent prices for both stocks. Participants had only five seconds to make each decision.

In the first study, the researchers measured the hormone levels of 140 men and women who played the stock market game. The second study involved 75 young and healthy men, each of whom took a cortisol, testosterone or placebo pill and then played the stock market game. In the latter study, the researchers found that those who took a hormone pill were more likely to make bold investments compared with those who took the placebo.

The researchers note that cortisol motivated risk-taking, while testosterone made participants more confident about future investment prospects.