High male hormone levels may cause stock market instability

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

said.

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

in Canada.

"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

Nadler.

 

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