How hormones can destabilise financial markets

August 7, 2015

Can hormones be instrumental in destabilising financial markets? Yes, says a study.

The hormones testosterone and cortisol may spur traders to take more risks, thereby hiking the risk of destabilisation of financial markets.

“Our aim is to understand more about what these hormones do. Then we can look at the environment in which traders work, and think about whether it is too stressful or too competitive,” said lead author Dr Ed Roberts from department of medicine at Imperial College London.

“These factors could be affecting traders’ hormones and having an impact on their decision-making.”

Researchers simulated the trading floor in the lab by having volunteers buy and sell assets among themselves. They measured the volunteers’ natural hormone levels in one experiment and artificially raised them in another.

When given doses of either hormone, the volunteers invested more in risky assets.

The researchers think the stressful and competitive environment of financial markets may promote high levels of cortisol and testosterone in traders.

Cortisol is elevated in response to physical or psychological stress, increasing blood sugar and preparing the body for a fight-or-flight response.

Previous studies have shown that men with higher testosterone levels are more likely to be confident and successful in competitive situations.

“Our view is that hormonal changes can help us understand traders’ behaviour, particularly during periods of financial instability,” said co-lead author Carlos Cueva from department of economics at the University of Alicante.

The authors of the study suggest the results should be considered by policymakers looking to develop more stable financial institutions.

“The results suggest that cortisol and testosterone promote risky investment behaviour in the short run.”

Economists have recognised that the unpredictability of human behaviour can make financial markets unstable. However, scientists have only recently begun to explore the physiological basis for this phenomenon.

The study was published in the journal Scientific Reports.