From molecule to market: steroid hormones and financial risk-taking

Abstract

Little is known about the role of the endocrine system in financial decision-making. Here, we survey research on steroid hormones and their cognitive effects, and examine potential links to trader performance in the financial markets. Preliminary findings suggest that cortisol codes for risk and testosterone for reward. A key finding of this endocrine research is the different cognitive effects of acute versus chronic exposure to hormones: acutely elevated steroids may optimize performance on a range of tasks; but chronically elevated steroids may promote irrational risk-reward choices. We present a hypothesis suggesting that the irrational exuberance and pessimism observed during market bubbles and crashes may be mediated by steroid hormones. If hormones can exaggerate market moves, then perhaps the age and sex composition among traders and asset managers may affect the level of instability witnessed in the financial markets.

Figures

Figure 1.

Schematic representation of the HPA and HPG axes and their effects on brain function. (a) Effects of steroid hormones on dopaminergic neurotransmisson in the nucleus accumbens; (b) genomic and non-genomic effects of steroids in the brain; for more details see text. GABA, γ-aminobutyric acid; NMDA, N-methyl-d-aspartate; GR, glucocorticoid receptor; AR, androgen receptor; plus, stimulatory effect; minus, inhibitory effect; dotted circles, steroid hormones (either glucocorticoid or testosterone); grey-shaded symbols, cognate ligands for other receptors.

Figure 2.

Schematic representation of a winner effect mediated by testosterone.

Figure 3.

P&L on low- and high-testosterone days. (a) P&L made between 11.00 and 16.00 for 17 traders on days when their testosterone levels were above their median level during the study (‘high T’) and on the rest of the days (‘low T’) (n = 17, paired t-test p = 0.008; Cohen's d = 0.97). P&Ls for each trader were standardized by dividing them by their 1-month average daily P&L. Standardized P&Ls were then averaged across all 17 traders. (b) Afternoon P&L for experienced traders only, i.e. ones with more than 2 years trading experience (n = 10, paired t-test p = 0.005; Cohen's d = 1.37).

Figure 4.

Inverted U-shaped dose–response curve relating cortsol levels to cognitive function, such as performance, on a spatial navigation or declarative memory task.