High testosterone levels can cause
stock market traders to overestimate future stock values and
change their trading behaviour, leading to dangerous price
bubbles and subsequent crashes, according to a study.
In the US, the majority of professional stock market
traders are young males and new evidence suggests biology
strongly influences their trading behaviour, researchers
According to the study, published in the journal
Management Science, this could be a significant contributor
to fluctuations in the market.
"This research suggests the need to consider hormonal
influences on decision-making in professional settings,
because biological factors can exacerbate capital risk," said
Amos Nadler of the Ivey Business School at Western University
"This is the first study to have shown that testosterone
changes the way the brain calculates value and returns in the
stock market and therefore - testosterone's neurologic
influence will cause traders to make suboptimal decisions
unless systems prevent them from occurring," Nadler said.
The study involved 140 young males, each of whom received
a topical gel containing either testosterone or a placebo,
prior to participating in an experimental asset market in
which they were able to post bid and ask prices, as well as
buy and sell financial assets to earn real money.
Researchers, including Peiran Jiao from the University of
Oxford in the UK, found that among groups that received
testosterone relative to those who received a placebo, larger
price bubbles formed and mispricing lasted longer.
They found that market dynamics changed to reflect
increasing bidding and selling volume, and their perception
of a stock's value changed despite its being displayed
throughout the study.
While the traders who received the placebo displayed "buy
low to sell high" behaviour, those who had received
testosterone adhered to "buy high to sell higher."
"Based on our findings, professional traders, investment
advisories, and hedge funds should limit the risk taken by
young male traders," said Nadler.
"The simplest recommendation is to implement 'cool down'
periods to interrupt exceptionally positive feedback cycles
and return the focus to assets' fundamental valuations to
reduce the possibility of biased decision-making," said
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