There’s a fascinating post on Testosterone, Cortisol and Market Behavior on the website Pure Pedantry. Normally, I’d have a whole lot of caveats and snarky comments to add, but Jake Young does a great job of handling an original research article by Coates and Herbert, ‘Endogenous steroids and financial risk taking on a London trading floor’ (abstract). You should definitely check out Jake’s post if you find this material interesting, as he deals with the article in greater depth. Unlike in my last piece on ‘neuroeconomics’, Bad brain science: Boobs caused subprime crisis, in which I thought the science writer involved was really responsible, in this case, it looks like the authors of the original study are partly to blame, and Young does a good job of highlighting this issue.

The original research paper examines the links between market risk-taking behaviour among traders with endogenous steroids: testosterone and cortisol. Since both are linked to aggression and stress, this would seem to be a good place to study the body’s response to risk taking. But things don’t go brilliantly, as Young suggests: ‘Let’s file this paper under “wildly over-interpreted” because there are some big caveats that you have to remember before you can make a claim anything like [hormone changes lead to market changes and higher market volatility].’

The abstract from the original article lays out the research:

Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader’s morning testosterone level predicts his day’s profitability. We also found that a trader’s cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader’s ability to engage in rational choice.

The fact that both testosterone and cortisol seem to cycle along with booms and busts of the market is not terribly surprising. As Young writes: ‘Testosterone has been shown to rise in runner’s who win races and fall in runner’s who lose races — the so-called winner’s effect. Cortisol is a stress hormone, and it isn’t unreasonable to expect it the trader’s to respond to market volatility by being stressed.’ The big problem both Young and I have with this research, however, is the creeping suggestion that the hormones are causing the market behaviour. Young argues that there’s a ‘big problem with the interpretation that these hormones are causal for financial depressions and volatility.’

The authors of the original study seem to disagree, and sometimes inconsistently, about whether to attribute causality or correlation to the hormone levels. The Nature News post on this article, The testosterone of trading, for example, reports that the authors are not in agreement: ‘Was the testosterone behind the winnings? Coates thinks so. But co-author Herbert cautions that the results aren’t strong enough to prove that testosterone is driving risky behaviour: “It remains a correlation, not a causation,” he says.’ I think that the relationship is probably more complex than either label captures, but a simple causal story — testosterone causes market bubbles — is probably the least helpful, least accurate way to describe the relationship, and not just because the ‘results aren’t strong enough.’

The irony is that the researchers seemed to understand that the hormones would not be causing the market effects in their initial hypotheses. From the original article:

Because testosterone has been found to play a role in winning and losing, and cortisol has been found to play a role in responding to stress and uncertainty, we developed the hypothesis that these steroids would respond to financial risk taking. Specifically, we predicted that testosterone would rise on days when traders made an above-average gain in the markets, and cortisol would rise on days when traders were stressed by an above-average loss.

In the discussion of the results, as well, the authors offer a nice discussion of how the endocrine system might act as the relay point between the activity of the market (including volatility or price rises) and the decision-making of traders. Their account of steroid feedback loops and the ways in which traders might persist in behavior even when it is no longer appropriate seems to me to be quite measured, and well done, unlike the idea that testosterone causes risk taking in some one-way, simplistic manner.

It’s odd, then, that at least one of the author perseveres in offering simplistic explanations. I’m sure he’s not aware of how crucial the causation-correlation issue is to some people, but it’s too sloppy. From the Nature News interview:

Coates says the findings point to an intriguing possibility — that hormones may be driving irrationality in the markets. The dizzying highs seen in market ‘bubbles’ may be pumped up further by elevated testosterone levels in traders, while crashes and sell-offs could be exacerbated by cortisol, he speculates.

I’m too suspicious of the instincts of science writers to simplify to blame this entirely on Coates. There’s always the danger in getting interviewed about our research (or even trying to write accessible explanations) that someone will misinterpret what we’re saying. Hell, every essay exam I gives me abundant examples of distorted versions of explanations that I once offered in lectures — reading the versions that students give back to me is always deeply sobering.

But Young’s critiques are more specific and penetrating than this, I believe. He highlights four problems with the original research: 1) a duration problem, especially arguing for a chronic effect on hormones using an acute experimental design; 2) the link between testosterone and aggressive behaviour has been shown to be complicated, with endocrinologists like Robert Sapolsky pointing out the unexpected nuances of this relationship; 3) the use of a gambling-related test, the Iowa Gambling Task, as a measure of ‘high risk-high profit’ behavior when it, in fact, tests whether subjects, lured by the possibility of a high return, persist in pursuing a lower profit strategy; and 4) the effect of increased cortisol is unpredictable, and unlikely to have the sort of collective stress effect that the authors argue. Young concludes:

Taking all these caveats into mind, I remain skeptical that this finding is anything other than an interesting correlation. In order to prove me wrong, they would have to perform a much longer survey associating this hormones with market behavior. They would also have to demonstrate that the doses of hormonese they are observing cause significant and consistent changes in behavior. They haven’t done either of those things.

Ironically, one cautionary note on the easy interpretation of the study’s results are offered in the Nature News piece by Benedict Stoddart, a trader at a London firm. ‘In reality, most employers want traders who try to remain calm, despite their raging hormones: “Testosterone is not something that banks would look for,” [Stoddart] says.’ In other words, running with your testosterone or cortisol, or pursuing any trading strategy driven by collective emotion, would likely be a problem and might shorten one’s potential employment. Perhaps one thing that makes traders successful isn’t just high testosterone (I doubt it), but rather the ability to know when to work against the emotional grain, when to check powerful contagious emotions such as panic or euphoria.

But ultimately I think there’s a bigger ‘take away’ from Young’s discussion: the mechanisms through which social moods or collective emotions become effective in individuals’ bodies or experiences are likely to be quite subtle and difficult to explain in a short few paragraphs. The idea that we could tell a simple story about the relations between individuals’ endocrine systems and market dynamics, when both of these systems are already so complex that they beggar the imagination at times, is a dangerous ambition, one likely to lead to distortion, crucial omissions, or misleading characterization.

References
Coates, J.M., and J. Herbert. 2008. Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the National Academy of Sciences (USA) 104 (16): 6167–6172. DOI: 10.1073/pnas.0704025105