Forget behavioral economics — the Naked Scientists science podcast interviews a scientist who is investigating the hormonal basis for bubbles and crashes. It's endocrinal economics!
John – We found that the traders, if they had high testosterone in the morning relative the the median levels, they made a lot more money for the rest of the day than they did on the days when they had low testosterone.
Meera – When most people think of testosterone they obviously associate it largely with males. Does this then mean that females are relatively unaffected?
John – Women have about 10% of the testosterone that men do. It's entirely possible that they're not subject to this kind of overconfidence.
Meera – But you're also looking into levels of cortisol, as well.
John – That's right. In the current environment that may be the more interesting steroid. When the market turns around it turns into a crash what can happen is that cortisol, which is a stress hormone, can become elevated in the bodies of traders. Cortisol, if you're exposed to it chronically at high levels for a long period of time, it can have a devastating effect on both the mind and the body. In terms of affecting traders decisions what it can do is affect the memories you recall. You tend to recall bad memories, negative precedents. You tend to see risk where maybe there is none. You become fearful, you feel anxiety. I think that decreases a trader's appetite for risk. While testosterone is causing people to take too much risk cortisol is causing people to take too little risk in the crash.