Endogenous steroids and financial risk taking on a London trading floor

doi:10.1073/pnas.0704025105

Endogenous steroids and financial risk taking on a London trading floor

J. M. Coates*,^†,^‡ and
J. Herbert*,^‡,^§

*Department of Physiology, Development and Neuroscience, University of Cambridge, Cambridge CB2 3DY, United Kingdom;
^†Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom; and
^§Cambridge Center for Brain Repair, University of Cambridge, Cambridge CB2 0PY, United Kingdom

Edited by Bruce S. McEwen, The Rockefeller University, New York, NY, and approved November 6, 2007 (received for review May 1, 2007)

Abstract

Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice.

Footnotes

^‡To whom correspondence may be addressed. E-mail: jmc98{at}cam.ac.uk or jh24{at}cam.ac.uk
Author contributions: J.M.C. and J.H. designed research; J.M.C. performed research; J.M.C. and J.H. analyzed data; and J.M.C. and J.H. wrote the paper.
The authors declare no conflict of interest.
This article is a PNAS Direct Submission.
↵ ¶ The Bank for International Settlements estimates that the market in equity, currency, commodity, and interest rate options, both over-the-counter and exchange-traded, now represents a notional amount of over $90 trillion, and even that number does not include markets in which implied volatility has a large effect on prices, such as the swap, mortgage, and insurance markets, or markets for new instruments, such as weather derivatives [Bank for International Settlements (2006) Semiannual OTC Derivatives Statistics at End December 2005 (www.bis.org/statistics/derstats.htm)].
↵ ‖ A couple of individual cases are worth mentioning. One trader who had a P&L several times his daily average one day level saw his mean testosterone rise 56% above his average for the other days. Another trader enjoyed a 6-day winning streak, averaging about twice his historic daily P&L, and in the course of this winning streak his mean daily testosterone levels rose 74%. Despite the high levels of these individual testosterone readings, none of them constituted an outlier. Traders' cortisol, as mentioned above, had an even higher day-to-day variance than testosterone.
↵ ** It has been suggested by a reviewer that these steroid-feedback loops may be relevant to explaining why market volatility tends to come in waves, a phenomenon economists term autoregressive conditional heteroskedasticity (ARCH) (36).