Testosterone levels predict city traders' profitability

Research provides insight into irrational decision making during crashes and bubbles

When City traders have high morning testosterone levels they make more than average profits for the rest of that day, researchers at the University of Cambridge have discovered.

The scientists hypothesize that this may be because testosterone has been found to increase confidence and appetite for risk – qualities that would augment the performance of any trader who had a positive expected return.

The influence of steroids naturally produced in the body (specifically testosterone and cortisol) may also provide insight into why people caught up in bubbles and crashes often find it difficult to make rational choices, unintentionally exacerbating financial crises.

Testosterone is a steroid hormone which controls competitive encounters as well as sexual behaviour. Testosterone in male athletes, for example, will rise prior to a competition and rise even further in a winning athlete (but decrease in a losing one). This increase of testosterone in the winner can increase confidence and risk taking and improve chances of winning yet again, leading to a positive-feedback loop termed the ‘winner effect’. However, too much testosterone can have a detrimental affect on the ability to assess risk rationally.

In order to determine how hormone levels affect those working in the financial sector, the researchers followed 17 City of London male traders for eight consecutive business days. To measure the traders’ hormones, they took saliva samples twice per day at 11:00 a.m. and 4:00 p.m., times that fell before and after the bulk of the day’s trading. At each sampling time, traders recorded their profit and loss (P&L).

Using the trader’s previous trading history, the scientists determined a daily-average to which they could compare the test results. They found that daily testosterone levels were significantly higher on days when traders made more than their one-month daily average than on other days.

The researchers also speculated that if testosterone continued to rise or became chronically elevated, it could begin to have the opposite effect on a trader’s profitability by increasing risk-taking to unprofitable levels. Previous studies have shown that administered testosterone can lead to irrational decision-making. They believe that this is because testosterone has also been found to lead to impulsivity and sensation seeking, to harmful risk taking, and in extreme cases (among users of anabolic steroids) to euphoria and mania.

Testosterone may therefore underlie a secondary consequence of the ‘winner effect’ in which a previous win in the markets leads to increased, and eventually irrational, risk taking in the next round of trading.

Professor Joe Herbert, Cambridge Centre for Brain Repair, said: “Market traders, like some other occupations (such as air traffic controllers), work under extreme pressure and the consequences of the rapid decisions they have to make can have profound consequences for them, and for the market as a whole. Our work suggests that these decisions may be biased by emotional and hormonal factors that have not so far been considered in any detail.