Testosterone and the Stock Market Mania

by Jeffrey Dach MD

Could the stock market boom and bust cycles be caused by raging hormone levels that surge out of control ? A stock trader turned neuroscientist studied hormone levels on Wall Street and found that profits made was determined by high testosterone levels starting off in the morning.    Higher testosterone levels correlated with higher profits  In his book, Mr. Coates found that the euphoria and elation during a bull market “mania” is due to surging hormone levels(1)

Image upper left: stock trader on phone courtesy of Telegraph UK .

Coates also measured cortisol levels in the traders.  Cortisol is the stress hormone made by the adrenal glands which will typically cortisol will go up with increased stress.  He found that Cortisol goes up after trading losses pile up, usually during increased market volatility and uncertainty.

The Hour Between the Dog and the Wolf

Next Coates published his book on the same topic, entitled, ” The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust.“(2)

The book is about how we deal with risk taking and stress, which produce changes in our body chemistry.

Left Image: Stock Traders courtesy of Daily Mail UK.

If trading activities lead to losses, this may produce an unconscious emotional response to stress and risk taking, including emotional feedback loops which cloud our rational thinking process.  In addition, the negative emotions of fear and avoidance may produce actual physiologic response and illness involving the autonomic nervous system.

Physiological Response to Negative Emotional Feedback Loop

The hormones levels can be measured in the traders.  More difficult to measure, but just as real, is the emotional feedback loop in response to wins or losses in trading.

When traders have a winning trade, this creates an emotional high and feedback loop which causes testosterone levels to go up.

However, when traders suffer severe trading losses, Cortisol goes up , and this triggers a negative emotional feedback loop of  fear and avoidance response.  The negative emotions may be so strong that the trader will  be unable to continue trading because of illness caused by a dysfunctional autonomic nervous system. The trader may experience symptoms of tachycardia, chest or abdominal pain, digestive problems, asthma etc all related to the autonomic nervous system dysfunction.

The Trading Coach

This physiological response to the negative emotional feedback loop may be so profound that the trader will be unable to function as a trader, will then quit trading and take up a different profession.  To get over this negative emotional feedback loop, the trader may seek out a trading coach such as  Robin Dayne who is featured in the You-Tube video below. (9)  Robin specializes in this problem and how to avoid or reverse it: (see the video)

In the Video,  Robin discusses:

1) How the brain stores information and transfers it into a trading action and how to stay in control.
2) Mental patterns of destruction with trading fears
3) How to condition great patterns for succeeding
4) How to know you are reaching a danger zone BEFORE it’s too late

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Jeffrey Dach MD

Links and References

1) http://www.pnas.org/content/105/16/6167.full 
Endogenous steroids and financial risk taking on a London trading floor by J. M. Coates * , † , ‡ and J. Herbert * , *Department of Physiology, Development and Neuroscience, University of Cambridge, Cambridge CB2 3DY, United Kingdom;†Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom; and §Cambridge Center for Brain Repair, University of Cambridge, Cambridge CB2 0PY, United Kingdom

Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader’s morning testosterone level predicts his day’s profitability. We also found that a trader’s cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader’s ability to engage in rational choice.

We found a significant relationship between testosterone and financial return and between cortisol and financial uncertainty, the latter being measured by the variance of economic return and the expected variance of the market.

2) http://blogs.cfainstitute.org/investor/2013/05/17/book-review-the-hour-between-dog-and-wolf-risk-taking-gut-feelings-and-the-biology-of-boom-and-bust/
17 May 2013  Book Review: The Hour between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust

3) http://www.wired.co.uk/news/archive/2012-07/13/testosterone-financial-crisis
Testosterone is to blame for financial market crashes, says neuroscientist
Science  13 July 12 by Olivia Solon

4) http://www.wired.co.uk/magazine/archive/2013/01/features/why-men-risk-it-all
The truth behind testosterone: why men risk it all
Science  27 January 13 by Joao Medeiros
The results were published in a 2008 report in the Proceedings of the National Academy of Sciences of the United States of America. Coates found that, on days when traders made an above-average profit, their testosterone levels went up. Most surprisingly, the testosterone levels in the morning predicted how much money the traders would make that day: high levels forecast high earnings. At the same time, the traders’ cortisol was unaffected by how much money they lost. Rather, cortisol levels were sensitive to the volatility in the market, which is a measure of risk and uncertainty.

5) http://www.bloomberg.com/news/2012-06-10/what-traders-testosterone-tells-us-about-markets.html
What Traders’ Testosterone Tells Us About Markets
By Mark Buchanan 2012-06-10T22:30:22Z
An unusual study of traders’ spit may offer a taste of the future in how we understand what drives markets — and why they aren’t as stable and efficient as we might hope.
Several years ago, two neuroscientists undertook an experiment on the trading floor of a major investment bank in London. Over eight consecutive business days, at both 11 a.m. and 4 p.m., John Coates and Joe Herbert took samples of saliva from the mouths of 17 traders. With these samples, taken before and after the bulk of the day’s trading activity, they measured the rising and falling levels of a number of steroid hormones, including testosterone, adrenaline and cortisol.

6) http://www.bloomberg.com/news/2012-05-13/goldman-bred-neuroscientist-bares-secret-of-testosterone-trading.html
Goldman-Bred Neuroscientist Tracks Testosterone Trading
By James Pressley – 2012-05-13T23:00:00Z

7) http://www.bloomberg.com/news/2012-06-10/what-traders-testosterone-tells-us-about-markets.html
What Traders’ Testosterone Tells Us About Markets
By Mark Buchanan Jun 10, 2012 6:30 PM ET

Joan Coates is the author of “The Hour Between Dog and Wolf.”
“The Hour Between Dog and Wolf: Risk-Taking, Gut Feelings and the Biology of Boom and Bust” is from Fourth Estate in the U.K. and will be published by Penguin Press in the U.S. in June (310 pages, 20 pounds, $27.95). To buy this book in North America, click here.

8) http://www.economist.com/node/21555882
Biology and financial instability
The molecules of mayhem
Testosterone and taking risks
May 26th 2012 | From the print edition

The Hour Between Dog and Wolf: Risk-Taking, Gut Feelings and the Biology of Boom and Bust. By John Coates. Fourth Estate

In one experiment Mr Coates sampled testosterone levels in traders in London and found that higher levels of the hormone in the morning correlated with beefier profits in the afternoon. Such profits came from taking higher risks, not greater skill.

“During a severe bear market,” writes Mr Coates, “the banking and investment community may rapidly develop into a clinical population.

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9)https://www.youtube.com/watch?v=QQUoJ-E4QZk