Researchers at Cambridge University tracked the levels of certain hormones – specifically testosterone and cortisol – in a group of British securities traders – and found a correlation between those levels and the performance of their stock picks.

On mornings of high testosterone, 14 of the 17 traders (all men, aged 18 to 38 ⁽¹⁾) included in the week-long study (eight consecutive days in 2005) made more money than usual for the rest of the day.

Drunk with Success?

In daily trading activity, Dr. John M. Coates – who spent time on Wall Street during the dot-com run-up – and Cambridge colleague Joseph Herbert looked for evidence of what endocrinologists call the “winner’s effect,” in which successive victories boost levels of testosterone higher and higher, until the winner is, effectively, “drunk’ with success, so overconfident that he can no longer think clearly, assess risk properly or make sound decisions.

On the other hand, the stress of market volatility on other days boosted cortisol levels. The researchers thought that too much cortisol, secreted in response to stress, might in turn make the traders overly sensitive to risk, making a market’s downward slide even more precipitous. Indeed, during the study, daily cortisol levels of some traders rose or fell fivefold, perhaps sapping their confidence.

“Hormones are still doing the same things in the context of a very different environment—making people competitive, aggressive, risk-taking—all the things you find on a trading floor and in a jungle,” said Joe Herbert, a University of Cambridge neuroscientist, and co-author of the study.

Levels of testosterone and cortisol were tested at the beginning (11 a.m.) and at the end (4 p.m.) of the trading day – and to better assure a range of volatile market conditions, the researchers conducted their study during a week when a series of major U.S. manufacturing and employment reports were scheduled to be announced. And on the days a trader’s testosterone was higher than usual in the morning, he tended to post higher profits. In fact, if the most experienced traders had performed all year as well as they did on high-testosterone days, they would have made about $1 million more, Coates said.

Cool Exteriors

Not that the chemical imbalances manifested themselves externally. To all surface appearances, “the experienced traders were quiet and poker-faced, in control,” said Coates, according to published reports. “In fact, underneath their cool exteriors, their endocrine systems were on fire. It is almost as if they had learned not only to control these hormones but also to harness them.”

Not that the researchers are advocating measures that boost testosterone levels as a means of improving investment performance. Higher testosterone levels did lead to greater risk taking, but that is then more likely to lead to a market bust as greed overtakes confidence. “As testosterone rises, at some point they start doing stupid things,” Coates said. And once that bust sets in, the resulting higher levels of cortisol are likely to make matters worse: traders will then be unwilling to take risks, even if rational analysis suggests that the environment is improving. “It tends to make you recall bad memories. You feel a lot of anxiety and see danger everywhere, even if there isn’t any danger. It makes you hyper-cautious,” Coates said in an interview with the Washington Post.

The researchers took particular note of a couple of individual cases in the study. One trader who had a profit that was several times his daily average one day level saw his mean testosterone rise 56% above his average for the other days, while 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%. However, the traders’ cortisol levels had an even higher day-to-day variance than testosterone. And, during the course of the study cortisol levels did not change wildly due to big losses but – seemed more connected to whether the trader was uncertain about whether he would lose or make money.

And these days you don’t have to be a trader to feel uncertain on that front.

The study, “Endogenous steroids and financial risk taking on a London trading floor,’ appeared in the April 14 Proceedings of the National Academy of Sciences.

⁽¹⁾ The unnamed UK brokerage firm involved in the study employed 260 traders – of those, there were just 4 women, and none volunteered for the experiment. Nonetheless, in a Washington Post interview, Coates said that trading houses might want to employ more older men and women, who tend to be “less prone to the pull of testosterone”.