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(Bloomberg) — Want to calm financial markets? Add more women and older people to the young men on trading desks.

That’s one recommendation from research into the role of hormones in provoking risky behavior in financial decisions. Cortisol and testosterone, more prevalent in young men, lead traders to take risks and keep taking them once they’ve had success, leading to winning streaks and crashes, said Ed Roberts, a researcher at Imperial College London.

Roberts and his colleagues gave the hormones or placebos to test subjects and had them make simulated investment decisions. Those dosed with hormones made riskier bets, according to a paper published today in the journal Scientific Reports.

Trading “is very dominated by young men, which is an unusual subset of people,” Roberts said in an interview. “It’s a higher testosterone group, a very competitive group. Do they perform as rationally as they would if they were in a group that’s mixed? The social environment has such a big role in people’s behavior.”

Other ways to reduce risky bets might be to limit personal incentives for traders, and ensure that financial data is released more frequently, which would reduce the uncertainty that stimulates the stress hormone cortisol, Roberts said.

By giving participants cortisol and testosterone, the researchers established a direct connection with taking chances in finance, said Roberts, who studies brain function and the endocrine system, the web of glands and hormones that influence decision-making.

‘Destabilizing Role’

“The observed effects are compatible with field observations in professional traders and suggest that these hormones may play a destabilizing role in financial markets,” the researchers wrote.
The findings build on earlier analysis that established that men are more likely to take chances than women. A previous study indicated that traders made greater profits on days when their morning testosterone levels were higher than their daily average and that market uncertainty was correlated with elevated cortisol.

The new study had two parts. In the first, 142 men and women played a fast-paced trading game without being given additional hormones, and their saliva was tested three times over two hours. High levels of cortisol in men were connected with trading frequency, mispricing and overall price instability. Women, who have other hormones such as estrogen that modulate the role of cortisol and testosterone, didn’t show the same effect.

In the second part, men were administered the hormones and asked to participate in mock trading sessions. Compared to men given a placebo, they favored riskier stocks. That experiment involved 75 people.

The study also examined the different roles played by cortisol and testosterone. Cortisol is produced at times of uncertainty and stress, triggering a “fight or flight” response that can promote risky or aggressive behavior. The effects often fade quickly.

Testosterone, by contrast, is related to optimism and self- confidence, and can build over days. Profiting from a trade can generate the hormone, resulting in self-confidence that can produce more success and more testosterone, Roberts said. The effect creates winning streaks and can lead to “irrational exuberance” that ends in a crash, he said.

Cortisol and testosterone “build on each other,” he said. “Both of them move you away from optimal risk-taking.”

By reducing the effects of hormones on trading, “you should get better returns and longer period of stability where people make money,” Roberts said. “That’s beneficial to everyone.”
The study was co-authored with Carlos Cueva, an economics professor at the University of Alicante in Spain. Other involved in the research came from institutions including the University of Cambridge, the U.K.’s Royal College of Psychiatrists, the University of Zurich and the University of Minnesota.

To contact the reporter on this story: Oliver Staley in New York at ostaley@bloomberg.net To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net David Risser, Marthe Fourcade