Citing John Maynard Keynes “animal spirits” and Alan Greenspan and Robert Shiller’s uses of the phrase “irrational exuberance”,  a study appearing in Scientific Reports suggests hormonal surges could lead to financial market instability.  Researchers injected cortisol or testosterone in young men and simulated an asset trading game, and found the subjects moving towards riskier assets.

The simulations had real monetary incentives, and were designed to measure risk-taking in quick decision models predicting price movements.  Cortisol, the “fight-or-flight” hormone, strongly influenced greater trading activity in men, the study found,  while women had a slightly negative downward trading correlation.  Both cortisol and testosterone were associated with “high variance” stocks — those with wider price movements.   Further, the injections weren’t measured to indicate higher trading in low variance stocks. The study attempted to control for learning and price expectations.

Acknowledging the “highly stressful and competitive” environments in financial trading environments, the study first attempted to measure increased stress simply through simulation, and created other measurements with exogenous hormone application.  Prior studies attempted to correlate stress hormone levels with actual trading outcomes. In a press release, co-author Carlos Cueva noted: “Our view is that hormonal changes can help us understand traders’ behavior, particularly during periods of financial instability.”  Dr. Cueva is a economics professor at the Universidad de Alicante in Spain.

The study found no increase in trading in multi-person simulations due to the testosterone injections, although the authors speculated an overly simple test design and small sample sizes impacted the findings.  They did, however, see higher risk taking, as measured through placing larger investments on riskier stocks.  The testosterone portion of the study was male-only.

Cortisol, the study’s authors concluded, “appears to affect risk preferences directly, whereas testosterone operates by inducing increased optimism about future price changes”, and speculated on how much the trader’s decision making were directly leading to “risky” behavior.

“Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behavior, acting via different behavioral pathways.”

“Our aim is to understand more about what these hormones do,” Ed Roberts, PhD, said in the release.  Dr. Roberts is from the Division of Brain Sciences and the Department of Medicine at the Imperial College in London.