Hormones Driving Credit Crisis

The BBC reports:

A Cambridge University team found testosterone levels were directly linked to the profit they made.
The Proceedings of the National Academy of Sciences study also found levels of the stress hormone cortisol could affect the risks they took.
A psychologist who works with investment bankers said it may help explain seemingly irrational behaviour.
The Cambridge study measured testosterone levels in a small group of male City of London traders at both 11am and 4pm, and matched these to the levels of profit or loss recorded for that day.

In other news, British men have testosterone?
I kid, I kid.

They found that daily testosterone levels were significantly higher on days when traders made more than their average profit.
They ascribe this to the “winner effect”, seen in sportsmen, in which success increases testosterone levels, which in turn increase feelings of confidence and ability to take risks, which then increase the chances of further profits.
However, if repeated too much, they say, the rising testosterone levels could eventually compromise their ability to make rational decisions, as the traders take bigger and bigger risks during so-called “bubbles”, where the market rises sharply.
Prof Joe Herbert, one of the study’s authors, said: “Our work suggests that these decisions may be biased by emotional and hormonal factors that have not so far been considered in any detail.
“Hormones may be important for determining how well an individual trader performs in the stressful and competitive world of the market.”

Read the whole thing.

Posted by Eddy Elfenbein on April 15th, 2008 at 9:11 am

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