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Correction to This Article
An earlier version of this article incorrectly reported the name of the journal that published the study. It was the Proceedings of the National Academy of Sciences.
Hormones Tied to Traders' Deal-Making, Study Finds
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By Rob Stein
Washington Post Staff Writer
Monday, April 21, 2008

It should come as no surprise that Wall Street traders work in a testosterone-saturated world, but scientists now have the first direct evidence that these Masters of the Universe may be bigger slaves to their hormones than anyone realized.

By measuring young male traders' hormone levels as they brokered high-stakes deals, the researchers showed that they tended to make more money on days when their testosterone levels were high. That suggests that the hormone makes them more likely to take profitable risks, but also that it may play a role in pumping up economic bubbles.

The small study also found that traders' levels of the stress hormone cortisol tended to fluctuate with the volatility in markets, indicating that it could be a factor in making brokers more cautious during downturns, helping to puncture speculative bubbles.

Together, the findings raise the provocative possibility that hormones may help drive boom-and-bust cycles, such as the turbulence currently buffeting the financial world.

"Economists have to start recognizing that investors and traders have bodies and that biology can have massive effects on the way they think," said John M. Coates, a senior research fellow at the University of Cambridge in England, whose findings are being published in tomorrow's issue of the Proceedings of the National Academies of Sciences. "If we are just modeling the economy based on the actions of a bunch of rational individuals, we're going to miss out on how powerfully biology can affect economic decision-making."

The findings are part of a growing body of evidence that economic choices are often less rational and more swayed by passions than economists appreciated, Coates and other researchers said.

"It's becoming clear that emotions are very important when it comes to financial decision-making," said Camelia M. Kuhnen, a Northwestern University finance professor who recently published a study in the journal NeuroReport that found men are more likely to risk money after viewing erotic images. "Both these studies indicate that there's a mechanism in the brain that allows emotions to influence financial decisions."

Other researchers praised the new study.

"It's very important," said Aldo Rustichini, who studies economics and neuroscience at the University of Minnesota. "It might give an explanation for irrational exuberance and why a crisis changes into a recession or a depression."

Coates's interest in how hormones affect traders began when he worked on Wall Street during the dot-com bubble of the 1990s.

"The traders seemed to be under the influence of a chemical," he said. "And when the bubble popped, they were like people with a hangover."

Coates knew that the testosterone level of male athletes tends to rise as they prepare to compete and jumps when they win, giving them an edge in the next round by boosting their drive to push the limits. The level drops when they lose, undercutting their self-assurance and chances of staging a comeback.

"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.

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