When it comes to hormonal behaviour, unfortunately we often think of women. Indeed, in macho environments such as trading floors, this thinking is probably more prevalent. But in a nice irony, it’s been found that in such environments, men experience major fluctuations in two naturally-occurring hormones: cortisol (stress) and testosterone.
A fascinating study published in 2015 by a team of researchers further studied these effects in a simulated trading environment. They found that higher levels of stress (cortisol) led to men trading more actively, but not women. They also found that higher stress levels were associated with riskier trading and greater market mispricings.
To spice things up, the researchers induced changes in the two hormones by applying hormone patches to the male participants. They found that the average investments in risky, more volatile, stocks increased sharply after increases in either cortisol or testosterone. The effects were bigger for those who were naturally more stressed and given more cortisol. While the effect was the same for those with naturally high or low levels of testosterone.
As for the particular mechanism through which these hormones affect trader thinking, their study found that testosterone, but not cortisol, resulted in expectations of bigger price increases. Without such optimism, trading behaviour would not change. Meanwhile, higher cortisol directly affected trading behaviour without an intermediate step of higher confidence or expecting greater price increases. So watch out for stressed men.