Orsakaðist kreppan af hormónum?

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 Traders should track their hormones

By John Coates

Published: April 14 2008 21:53 | Last updated: April 14 2008 21:53

Alan Greenspan, the former chairman of the US Federal Reserve, recently lamented that economics will never have a perfect model of risk. The problem, he said, is that economists cannot fathom the will o’ the wisp of market sentiment. Yet today, neuroscience and endocrinology may help us understand these troublesome spirits. For the waves of irrational exuberance and pessimism that destabilise the financial markets may be driven by naturally produced steroid hormones.

Steroids such as testosterone and cortisol affect our moods, memories and behaviour. Testosterone, for example, surges in males as they prepare for a competition, and continues to rise in the winner while falling in the loser. The winner, primed by elevated testosterone, experiences increased confidence and risk-taking and this improves his chances of winning again, leading to a positive feedback loop termed the “winner effect”.

However, at some point in this winning streak the elevated steroids begin to have the opposite effect on success and survival. Animals experiencing this upward spiral of testosterone and victory have been found after a while to start more fights, to neglect parenting duties and to patrol larger areas, all of which leads them to suffer an increased predation. As levels of testosterone rise, effective risk-taking gradually turns into dangerous behaviour.

Could this upward surge of testosterone, cockiness and risky behaviour also occur in the financial markets? This was a question I asked while working on Wall Street during the dotcom bubble. Many traders at this time displayed manic behaviour and a sense of infallibility. Equally telling was that women appeared relatively unaffected. Both facts implicated a chemical such as testosterone.

Returning to Cambridge, I, with a colleague’s help, sampled testosterone and cortisol from a group of male traders in the City of London. We found that a trader’s daily testosterone levels were indeed higher when he made an above average profit. We also found that the higher a trader’s morning testosterone, the more money he made that day. This effect was most pronounced in experienced traders.

Cortisol, a stress hormone, told us a different story. When reacting to a challenge, cortisol slows down long-term functions of the body, such as digestion and reproduction, marshals glucose for immediate use and promotes an anticipatory arousal. Cortisol reacts with particular force under conditions of novelty and uncertainty. We found that cortisol rose with the variance of the trader’s profits. It also rose in lockstep with implied volatility in the options market, raising the intriguing possibility of a biological substrate for the derivatives market. Cortisol was preparing traders for an impending market move; like testosterone, it was highest and most volatile in experienced traders. They appear cool and unemotional, but beneath the poker face is an endocrine system on fire.

Cortisol and testosterone, it appears, are the chemical messengers our bodies use to signal economic risk and return. Moderate levels of steroids prepare traders for taking risks, but higher levels can impair judgment. If testosterone continued to rise it could, by fostering over-confidence and risk-seeking, lead traders to make irresponsible trades. Testosterone is likely to rise in a bull market, increase risk and exaggerate the rally. Chronic cortisol exposure, on the other hand, promotes feelings of anxiety, a selective recall of disturbing memories and a tendency to find danger where none exists. Cortisol is likely to rise in a crash, make traders dramatically and perhaps irrationally risk-averse, and exaggerate the sell-off.

In the present crisis, traders, exposed for months now to the noxious effects of cortisol, may end up in a psychological state known as “learnt helplessness”. As a result they may become price insensitive, blunting the instruments of monetary policy. A better model of risk, it seems, would ask questions about the physiology of investors, not just their rationality. For example, if bubbles are amplified by a testosterone feedback loop, does this mean they are largely a male phenomenon? Would a greater presence of women and older men in the markets help stabilise them? If risk preferences are determined in part by hormones, then a risk reduction strategy for banks might entail diversifying the endocrine profiles on their trading floors.

The writer, a research fellow at Cambridge University, previously ran a trading desk for Deutsche Bank. His study is published on Tuesday in the Proceedings of the National Academy of Sciences