Cortisol is a glucosteroid produced by the adrenal glands situated above the kidneys. For our purposes it is best known as the “stress hormone.”
The function of cortisol is simple: it’s the body’s ultimate tool in response to stress. Cortisol breaks down fat reserves into glucose for quick energy and limits the body’s immune response. It also stimulates the formulation of short-term “flash bulb” memories. It’s an efficient tool but long term cortisol production can be disastrous. It leads to panic, fatigue, loss of memory, and complete helplessness.
Additionally, cortisol acts as a key ingredient in interpersonal relationships and emotional well being; its presence spikes in response to separation.
So how is this relevant to business, risk management and the market? In several ways. It’s relevant on both a personal level in leadership (whether personal decisions or financial), risk preference, business deals, investment, etc., and on a macro level in bear markets, economic crashes, financial bailouts, etc. Cortisol levels in traders have been shown to be directly proportional to rises in market volatility. Furthermore, the negative, long term signs of cortisol elevation (learned helplessness, panic) are the hallmark of bear market psychosis.
Additionally, cortisol is directly influenced by the Circadian Rhythm aka “the light-dark sleep cycle.” The release of cortisol is affected by a process involving light and the retina, and a part of the hypothalamus in the brain called the “SCN” (Superchiasmatic nuclei), which directly controls the circadian rhythms in humans.
There’s so much information on cortisol and its effect on finance and each topic really deserves its own post. Stay tuned!
*Copyright JMG Mind & Money