So finally, I gave in. For years now colleagues and friends had been complaining that each time I told them about one of my most recent economic élucubrations, I referred them to a website full of articles written in Dutch… So for once, and at the request of purely imaginary popular demand, a first attempt in English. To be repeated or not to be repeated, that remains to be seen.
You might remember the, by now already somewhat dated, study of two Cambridge professors, John Coates and Joe Herbert, who published in April 2008 in the Proceedings of the National Academy of Sciences, an article on the relationship between the risk behaviour of stock brokers and their testosterone level. It was one of those studies that probably raised first and foremost the testosterone level of the Cambridge professors themselves who made a Google hit with their article and of the science editors of popular newspapers who for once scored high with one of their articles. But it wasn’t really a large, well designed evidence-based, scientific study paying careful attention to multiple causality effects. For eight days, seventeen London City stockbrokers were tested for the testosterone level in their saliva both in the morning, at the start of trading, and in the evening, at the close of trading. The results hit it is fair to say the media but not the stock market...
As The Guardian reported: “real men make more money”. Stockbrokers, nearly always young men, appeared to be strongly influenced in their daily trading by their morning testosterone level. At the same time, the most successful traders saw their testosterone level increase over the day and week sometimes quite significantly. For traders with an initial high testosterone level, successful competitive trading seemed to act like a testosterone shot: their self-confidence increased further, so that they were tempted to take more and more risks. As the New York Times put it, reporting on the study: “excessive testosterone levels can lead a trader to make irrational decisions… One trader went on a six-day winning streak, making twice as much money each day as the previous one. Over that period, his testosterone levels rose steadily, some 74 per cent."
As could be expected, the study let to numerous other experimental studies using amongst others young male students in a game situation. The conclusions generally confirmed the Coates and Herbert results: young male students with a higher than average testosterone level would in competitive environments systematically take more risks when confronted with investment decisions. For John Coates, who had himself been a stock trader on Wall Street a decade before, and had witnessed the irrational exuberance of the dotcom frenzy, these results were of course no surprise. Coates had been struck by the often, totally irrational enthusiasm of his male colleagues at particular trading moments: applauding like fanatic supporters when football players appear on the field; in this case though when trading figures would appear on the scroll. He also noted that the few female traders who were around would not participate in this frenzy. An exploration of behavioural research on the winner model, seemed hence quite natural.
Both for humans and animals, it has been established that the testosterone level of a winner increases further whereas in the case of a loser it declines. The winner will typically in first instance profit, up to the moment that a too high level of testosterone will induce him to take unnecessary risks. In this sense, it is no surprise that the concept of a “bull market” refers explicitly to the bull: the animal more or less identified with testosterone. In this sense a rising “bull market” appears quite logically driven by testosterone reducing risk aversive behaviour.
At the same time, the Cambridge study also emphasized the impact of the other hormone cortisol on stock trading behaviour. The cortisol hormone appears an indicator for insecurity and stress in periods of hectic and stressful trading. In the current economic crisis, one might assume that the way this hormone affects investment decisions will translate itself primarily in overly risk-aversive behaviour: the currently most characteristic behaviour of the whole financial sector. The search for security, for increased capital leverage, for low risk investments will lead to the sort of common response one observes today across the full spectrum of financial institutions. Market information becomes suddenly unified in a risk-aversive direction. Taking an underdog position appears today a rational winner’s strategy: if proven wrong, the excitement over possible future, positive outcomes will more than compensate for the wrong advice. Like in a football game, in case of total uncertainty about one’s winning chances, much better to position one selves as likely looser. Applause, even fame will be the result in case of success.
It is, given the substantial contribution of behavioural economics over the last twenty years, surprising that so little research has been carried out on the biological, hormone production aspects of economic trading activities. To paraphrase Clinton: it’s the economists, stupid!
And in particular those economic trading activities dominated by young males. There are actually already websites on testosterone economics, exploring further possible links between the usual experiments with ultimatum games and testosterone levels in players. It is undoubtedly clear that sectors such as stock trading which are overly dominated by young males might, as Coates and Herbert suggested in their study, benefit most from a stronger participation of women.
In short, the French saying cherchez la femme might well become in economics, finance and business, the new most reliable indicator for long term, sustainable growth and investment.
Luc Soete,
March 27th, 2009
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