Forget volatility. Want success in the stock market? Man, watch out your sex hormone level!
A new study has found that higher testosterone in the morning leads to higher earnings for the rest of that day.
Researchers at the University of Cambridge have found that testosterone increases confidence and appetite for risk -- qualities that may augment the performance of any financial trader who expect a positive expected return.
"Market traders work under extreme pressure and the consequences of the rapid decisions they have to make can have profound consequences for them, and for the market as a whole. Our work suggests these decisions may be biased by emotional and hormonal factors that have not so far been considered," one of the researchers, Prof Joe Herbert, was quoted by the British media as saying.
"Any theory of financial decision-making in the highly demanding environment of market trading now needs to take these hormonal changes into account. Inappropriate risk-taking may be disastrous," Herbert said.
"Hormones may also be important for determining how well an individual trader performs in the highly stressful and competitive world of the market. We are now exploring this in much more detail," Herbert added.
But, beware! Too much exposure to the male hormone can trigger irrational risk-taking and lead to massive losses, the study has revealed.
In order to determine how hormone levels affect those working in the financial sector, the researchers followed 17 City of London male traders for eight consecutive days.
They took saliva samples twice per day at 11 am and 4 am -- that is, before and after the bulk of the day's trading -- to measure the traders' hormones. At each sampling time, the brokers recorded their profit and loss.
Using the trader's previous trading history, the researchers determined a daily average to which they could compare the test results. They found that daily testosterone levels were significantly higher on days when traders made more than their one-month daily average than on other days.
The Cambridge team also discovered that levels of stress hormone cortisol rose in direct relation to market volatility and that "an increase in cortisol leads to risk aversion" and "exaggerate the market's downward movement."
"Rising levels of testosterone and cortisol prepare traders for taking risk. However, if testosterone reaches physiological limits, as it might during a market bubble, it can turn risk-taking into a form of addiction, while extreme cortisol during a crash can make traders shun risk," the study's lead author John Coates said.
