Hormones Tied to Traders' Deal-Making, Study Finds

"This is the biological substrate for winning and losing streaks," said Coates, noting that testosterone-induced bravado inevitably peaks, causing winners to reach too far.

"As testosterone rises, at some point they start doing stupid things," Coates said.

After the dot-com bubble burst, Coates changed careers and moved to England, where he devised an experiment with University of Cambridge neuroscientist Joe Herbert. In addition to testosterone, the pair measured cortisol, which over time tends to have the opposite effect of testosterone, making people more skittish.

"It tends to make you recall bad memories. You feel a lot of anxiety and see danger everywhere, even if there isn't any danger. It makes you hyper-cautious," Coates said.

The pair took saliva samples to measure hormones from 17 typical London traders -- men ages 18 to 38 -- at 11 a.m. and 4 p.m. for eight consecutive business days in 2005.

On the days a trader's testosterone was higher than usual in the morning -- before most deal-making began -- he tended to post higher profits, the researchers found. The amounts varied, but on average, if the most experienced traders had performed all year as well as they did on high-testosterone days, they would have made about $1 million more, Coates said.

The researchers were surprised to discover that the traders did not tend to make less money on days when their cortisol was higher. But they did find that cortisol levels tracked the volatility of the market: the greater the uncertainty, the higher the cortisol, and the hormone spiked as the release of key economic data approached.

"As volatility increases after a crash, it may start affecting traders and make them risk-averse. They may see danger everywhere and not want to take risks. As securities get cheaper and cheaper and you would expect them to buy, they might not buy. It's sort of what we're seeing right now," Coates said.

Together, Herbert said, the findings indicate that "once we're in a situation where things are going up or going down, it's reinforced by these hormone changes."

If substantiated by further studies the researchers are planning, the findings may complicate the task of regulating markets, Coates said.

"Monetary policy is based on price signals. If traders are not responding, then you have a problem," he said. "It makes it extremely difficult to stop a bubble and extremely difficult to stop a crash using price signals."

Coates warned against interpreting the results to mean that traders might make a killing more often by taking testosterone supplements. That could backfire by disrupting the body's finely calibrated hormonal system.

"Guys would probably just ruin their health and not make any money," he said.

But trading houses might want to employ more older men and women, who tend to be less prone to the pull of testosterone, Coates said.

"Banks and the financial system generally may be more stable if they had a greater diversity of endocrine profiles," Coates said.