Behavior of Impetuous Traders and Their Effects in Economy: A Derivation
This article may sound so absurd to you, especially if you have been a trader and a stock market broker for years now. But it is difficult to ignore a research from the University of Cambridge that suggests that the movements of money in the financial markets are correlated to stock traders' levels of two hormones: the steroids testosterone and cortisol.
Researchers John Coates and Joe Herbert took saliva samples from 17 male traders on a London stock trading floor twice daily over the course of eight days. They observed the traders' levels of testosterone, the hormone most often linked with aggression and sexual behaviour, and cortisol, the so-called stress hormone.
They tracked those levels against the amount of money that a trader made or lost, and against the variation in the market. The result was this: When the traders (under observation) made more money, they had elevated levels of testosterone, and when the markets were particularly variable, they had elevated levels of cortisol.
The question now is, which is the cause and which is the effect? Further on in their analysis, data showed that traders who started their days with elevated testosterone made more money than those who didn't. There was this one trader who went on a six-day winning streak, making twice as much money each day as the previous one. Over that period, his testosterone levels showed a steady increase, some 74 per cent.
But there is also a downside in increased testosterone level. It has a point of diminishing returns; too much testosterone leads to too much aggression and reckless decision making. John Coates is quoted in saying, "The popular view is that experienced traders can control their emotions, but in fact their endocrine systems are on fire."
On the other hand elevated cortisol levels probably may contribute to better risk management in volatile situations. Bruce McEwan (a neuroendocrinologist in Rockefeller University, New York) goes on to say, “Long-term elevation can ravage the body with anything from cardiovascular disease to arthritis. It also leads to shrinkage of the prefrontal cortex and hippocampus (brain regions associated with decision making and factual memory). Meanwhile it contributes to growth in the amygdala, a region associated with emotional memory and anxiety.”
This is not good because it can develop to a condition called "learned helplessness", in which people feel that their actions in risky situations don't matter. Coates, being a trader before is concerned not on how far the markets go, but for how long. He believes that learned helplessness can happen.
Would these 'raging hormones' study now help a trader in his victory? We now learned that both the short- and the long-term effects of the hormones can contribute to the overall health of the markets. Coates thought that maybe if more women and older men were trading, the markets would be more stable.
Earlier studies already testify that testosterone can indeed be responsive to defeat or victory, but the directionality wasn't clear. Anyway, we still like to think of ourselves as emancipated from these biological processes, that the intellectual and emotional are totally separate, don't we?
About the Author: The Author is also the Content Provider for Track and Field, Notting Hill and Florida Fishing.
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Print Article | Download PDF | 8 views | Aug 20 2008
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