Barbara Daroca: Do (Male) Hormones Drive Financial Markets?

Research suggests people take more risk in the trading floor because the stressful, competitive environment itself boosts certain hormones – to the point of destabilising financial markets!

A British study published in 2015 (*) suggests that the alteration in the levels of testosterone (a hormone known to affect men’s behaviour) and cortisol (a hormone that modulates the response to physical or psychological stress) in male market traders could play a destabilising role in financial markets through risk-taking behaviour.

For their study, researchers simulated a real-world trading floor by having 142 men and women buy and sell assets among themselves. In the first experiment, they recorded the levels of cortisol and testosterone in people participating in the study and found that, in men, high levels of cortisol were linked to increased trading activity as well as the likelihood of mis-pricing and overall price instability. In the second experiment, researchers administered either cortisol or testosterone to young males before they played the asset trading game and found that both cortisol and testosterone shifted investment toward riskier assets. Cortisol appears to affect risk preferences directly and testosterone operates by inducing increased optimism about future price changes. Another study, conducted in 2008 in real conditions with 17 male London traders by John Coates – a former derivatives trader turned neuroscientist -, led to the same conclusions.

Does it mean that women would make better traders than men? According to recent research, the answer is “yes”. Researchers in the Department of Economics at the University of Leicester showed that employing a greater number of female traders would reduce the occurrence of the most extreme market crashes and increase the regularity of positive trading returns. Female traders have higher average earnings than their male counterparts. As they take less risks, they make extreme profits less frequently but also lose less money.

Despite these findings, the majority of trading desks continue to be dominated by male traders. Dr Daniel Ladley, Senior Lecturer in Finance at the University of Leicester and Deputy Director of the Leicester Institute of Finance, says this is due to reward schemes in financial firms. Financial bonus schemes typically reward the best performers and they are usually men. Trying to change the gender balance of the trading population will require a complete change in how firms reward their staff – from a culture that only rewards star traders to a system that rewards better consistent profits. Useless to say that the road to gender equality in financial markets is still long and hard…

* Cortisol and testosterone increase financial risk taking and may destabilize markets, Scientific Reports, July 2015