Report: the Economy Is Driven by Hormones

High cortisol and testosterone levels could affect risk-assessment and market stability.

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Jul 2 2015, 1:00pm

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According to a study published today in Scientific Reports, stock brokers may be making poor decisions due to feeling cocky or stressed—not a huge shock, but still bad news considering they work in an industry that, in addition to rewarding confidence and routinely demanding long work days, can have a dramatic effect on the economy.

Furthermore, men may be more susceptible to this hormonal effect than women due to their higher testosterone levels.

To come to this conclusion, the team of researchers at Imperial College London examined the impact that levels of testosterone and cortisol had on trading performance and risk-taking.

To do this, the team set up a mock trading floor using asset-trading games with 142 Cambridge students, and recorded their hormone levels and the trades they made. They then ran the same experiment with 75 young men whose testosterone or cortisol levels were artificially raised using testosterone gel and cortisol pills.

The team found that those with higher levels of either hormone—especially on the trading floor full of artificially hormonal young men, who are more sensitive to testosterone than women—were much more likely to act erratically or to take big risks.

"We found that both cortisol and testosterone shifted investment towards riskier assets," the paper says. "Cortisol appears to affect risk preferences directly, whereas testosterone operates by inducing increased optimism about future price changes. Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behaviour, acting via different behavioural pathways."

"I would say the effect is subtle, but if everyone in a market is being affected in the same way, the results could be dramatic."


This research echoes earlier studies that linked testosterone to risk taking, but refutes the "dual-hormone hypothesis," which found that "there was a positive association between basal testosterone and risk-taking among individuals low in basal cortisol but not individuals high in basal cortisol," according to a study from June in Psychoneuroendocrinology.

In other words, some researchers have found in the past that high testosterone levels lead to more risk-taking behavior, while high cortisol levels can counteract the effect of high testosterone, making people less likely to invest aggressively out of stress-induced fear.

According to this new study, however, there is "no evidence for a significant interaction between cortisol and testosterone, as is proposed by the dual-hormone hypothesis."

Instead, the Imperial College London researchers found that administering either cortisol or testosterone led to less cautious investments, which in turn led to price instability. Dr. Ed Roberts, one of the lead authors of the study, explained that this instability was the function of basic economic principles.

"Markets generally become unstable because the ability to make accurate assessments of risk is impaired in some way—like bad information about an asset," Roberts told Motherboard in an email. "In our study, we observed individuals increasing their investments in riskier stocks by 70 percent after cortisol, and 46 percent after testosterone."

Roberts explained that the connection is the result of the behavioral impact of those hormones; cortisol is a stress hormone, which he said can make it "more difficult to be objective about your own behavior." Testosterone, on the other hand, is "associated with increased aggression, sexual function and mood," and can make traders overly confident in their own abilities and overly optimistic in their investments.

While these two hormones act differently, they had essentially the same outcome: more risky investments that led to price instability.

Roberts stressed that these results were focused on the short term, and that long-term implications of risky investments—like stock bubbles forming and bursting—cannot yet be directly linked to these hormones. He added, however, that their effect can add up.

"If you can imagine times when you were very stressed, you can look back on that and realise that you made mistakes or behaved erratically, but when you were in the moment it's more difficult to be objective about your own behaviour," Robert said. "I would say the effect is subtle, but if everyone in a market is being affected in the same way, the results could be dramatic."

Roberts also added that the study was done in a laboratory setting, which is never exactly like the real world, but that they are looking to replicate their findings in a more realistic setting.

"We observed individuals increasing their investments in riskier stocks by 70 percent after cortisol, and 46 percent after testosterone."

"The problem with laboratory research is that it is only ever an approximation of the real world, so although we used real financial incentives, we couldn't recreate the exact conditions of working on a financial trading floor," Roberts said. "But we think we did quite a good job. Running a real-life environment test would be fascinating, and it's something we would be keen to do."

As a result of his team's findings, Roberts said it was important for financial institutions to recognize the impact that stress and mood can have on not only their traders' performance, but also on the global marketplace as a whole.

"Everyone benefits from an efficient market, so traders who are highly stressed could look at rotating their time at the desk in a similar way to air traffic controllers," Roberts said. "Given the importance of these institutions, it's critical that these questions are discussed in a productive way to improve market stability."