A new study on testosterone is no bull for a male dominated industry.
As in other decision-making arenas like, for example, buying a new car or deciding where to go for dinner, research has consistently shown that the financial markets and, particularly, investors’ decisions can be influenced by a range of factors unrelated to an asset’s fundamental value.
Everything from the weather to a stock trader’s mood to who won last night’s hockey game have been found to push people into making irrational trading decisions, thereby contributing to market trends such as bubbles and crashes.
And while, in general, hormonal influences on behaviour are clear, their role in market fluctuations has been less studied. For example, it’s known that men have much higher levels of testosterone than women (five to 25 times higher) and that male traders take more risks, show greater overconfidence and effectively generate larger price bubbles than female traders.
One study found that the amount of money that a male trader makes in a day is associated with his testosterone level and that a trader’s testosterone level at the beginning of the day influences his success over the course of the day.
Might it be the case that testosterone itself is to blame for this type of wild, irrational trading behaviour? In fact, it is, says a new study titled, “The Bull of Wall Street: Experimental Analysisof Testosterone and Asset Trading,” from researchers at the Ivey Business School at Western University in London, Ontario, University of Oxford and Claremont Graduate University in California.
The study involved 140 male participants who were given either a topical gel containing testosterone or a placebo before participating in mock trading sessions. Participants bought, sold and bid on stocks in competition to see who could come out with the most money in the end, with the results showing that the testosterone boosts affected traders’ behaviour, causing them to increase their trading volume and selling prices and alter their perception of a stock’s true value.
All in all, the testosterone-fuelled trading ended up inflating stock prices, with the testosterone-boosted traders paying more for assets than those in the placebo group and showing less risk aversion.
The result? Larger stock bubbles and crashes, say the researchers.
“We show that exogenously increasing testosterone in men increases bid prices and asset price bubbles, and slows the incorporation of fundamental value,” say the study’s authors. “We also demonstrate how the changes in buying and selling pressures give rise to bubbles and subsequent crashes.”
The results should be a warning to financial companies who want to better understand how outside factors —in this case, biological ones— are influencing trading decisions and market movement, say the authors, who offer that firms should consider “cool-down periods” for traders to prevent market overheating and positive feedback cycles.
Another option? Hire more women traders, says one expert on the psychology of traders who has studied the phenomenon known as psychological momentum, that state of mind where a person feels that events are, for whatever reason, going in their favour.
In a recent study, Dr. Ze’ev Shtudiner of the Department of Economics and Business Administration at Ariel University in Israel found that psychological momentum plays a role in male behaviour much more than in female behaviour. In the financial realm, where 90 per cent of traders are men, this results in exaggerated risks and price bubbles, says Shtudiner. "By increasing the number of women in financial markets, it may be possible to stabilize these markets since women have less dramatic shifts in testosterone levels, which can make them less prone to the momentum effect,” he says.