High testosterone levels: One of the peculiar reasons why stock markets crash
It’s in the hormones
High testosterone levels can cause stock market traders to overestimate future stock values and change their trading behaviour, leading to dangerous price bubbles and subsequent crashes, according to a study.
Young, wild and free
In the US, the majority of professional stock market traders are young males and new evidence suggests biology strongly influences their trading behaviour, researchers said.
Now you know the reason for fluctuations
According to the study, published in the journal Management Science, this could be a significant contributor to fluctuations in the market.
"This research suggests the need to consider hormonal influences on decision-making in professional settings, because biological factors can exacerbate capital risk," said Amos Nadler of the Ivey Business School at Western University in Canada.
"This is the first study to have shown that testosterone changes the way the brain calculates value and returns in the stock market and therefore - testosterone's neurologic influence will cause traders to make suboptimal decisions unless systems prevent them from occurring," Nadler said.
Testosterone: The sinner
The study involved 140 young males, each of whom received a topical gel containing either testosterone or a placebo, prior to participating in an experimental asset market in which they were able to post bid and ask prices, as well as buy and sell financial assets to earn real money.
Researchers, including Peiran Jiao from the University of Oxford in the UK, found that among groups that received testosterone relative to those who received a placebo, larger price bubbles formed and mispricing lasted longer.
Change in the market dynamics
They found that market dynamics changed to reflect increasing bidding and selling volume, and their perception of a stock's value changed despite its being displayed throughout the study.
While the traders who received the placebo displayed "buy low to sell high" behaviour, those who had received testosterone adhered to "buy high to sell higher."
The fault in the market’s stars
"Based on our findings, professional traders, investment advisories, and hedge funds should limit the risk taken by young male traders," said Nadler.
"The simplest 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," said Nadler.
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