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A study from 2008 explores the impact of endogenous steroids on financial decisions of stock options traders in London. Looks like those high testosterone jocks are winners, scientifically.

“We looked into the direction of the relationship between testosterone and P&L. To do so, we analyzed a trader’s 11:00 a.m. testosterone and the P&L he made after this sampling time…On days of higher 11:00 a.m. testosterone, traders made a P&L for the rest of the day that was significantly greater than on lower testosterone days.”*

This doesn’t say that testosterone rises with profit margins. It says higher testosterone measurements before the trading events even occur actually predict a greater profit margin later in the day. The conclusion is that higher testosterone (individually…we’re comparing individuals’ level of test. against themselves; no inter-personal data) leads to better profits.

“Testosterone has been found…to increase search persistence, appetite for risk, and fearlessness in the face of novelty, qualities that would augment…performance.”*

So testosterone is actually quite good. And interestingly, testosterone has a cascading effect, winning begets winning. Winning in of itself leads to a a surge of testosterone, which then continues the positive feedback loop.

So then high testosterone is good all the time, right? Wrong.

“If testosterone continued to rise or became chronically elevated, it could begin to have the opposite effect on P&L and survival, because testosterone has also been found to lead to impulsivity and… harmful risk taking. In one study, testosterone…led to irrational risk–reward tradeoffs.”

Ahh and there’s the catch. So testosterone can be good, but too much or too long and it becomes a negative.

Furthermore, testosterone is addictive!

“It has also been found that testosterone and its metabolite, 3-androstanediol, have rewarding and addictive properties, largely because they increase dopamine release.”

The paper then suggests that the “rational choice theory” we discussed yesterday may indeed be obsolete.

“Testosterone may therefore underlie a financial variant of the‘‘winner effect,’’ in which a previous win in the markets leads to androgenic priming and increased (and eventually irrational) risk taking in the next round of trading. This effect, even if confined to a small number of people, could cause financial markets to deviate from the predictions of rational choice theory.”*

So when you win, be careful. Because too much winning can make you addicted to the high, go crazy risk taking, and then lose.

*Endogenous steroids and financial risk taking on a London trading floor, J. M. Coates and J. Herbert, 2008