Higher levels of testosterone, the male sex hormone, can directly influence traders to take financial decisions that can drive prices up and destabilise markets, a study has found.
The findings showed that the changes in buying and selling pressures give rise to bubbles and subsequent crashes as the hormone directly increases the size and persistence of stock market bubbles.
Testosterone drives these changes in market dynamics by increasing bidding, selling prices, and volume and changed traders' perception of a stock's current value even though true values were known during trading.
"The study shows that exogenously increasing testosterone in men increases bid prices and asset price bubbles, and slows the incorporation of fundamental value," said Amos Nadler, assistant professor at the Ivey Business School in Ontario, Canada.
"These results demonstrate the effects of a specific hormone, testosterone, on male traders in experimental markets," Nadler added.
Bubble in a stock market takes place when traders drive stock prices above their value, while a stock market crash is a sudden dramatic decline of stock prices, resulting in a significant loss.
For the study, appearing in the journal Management Science, the team used experimental stock markets, where traders were given testosterone or placebo gel prior to their trading sessions.
The results showed that testosterone directly influences traders to take financial risks.
According to Nadler, the research suggests the need to consider hormonal influences on decision making in professional settings because biological factors can exacerbate capital risk for firms and market risk for all participants.
The most straightforward recommendation is to implement "cool down" periods to interrupt exceptionally positive feedback cycles and return the focus to assets' fundamental valuations to reduce the possibility of biased decision making, Nadler added.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)