T is for Testosterone…and Trading

Just two days apart, two articles with the word “testosterone” in the headline made me think that I was reading the science pages, not the financial ones. Of course I have seen the effects of testosterone gone wild when I was a trader on the floor of the Commodities Exchange in NY. There was an almost animal spirit to the pits, which after reading the latest research on the hormone, may in fact be attributed to the magic T.

According to a study by two researchers (John Coates and Joe Herbert) from the University of Cambridge, there is a link between the level of testosterone and the profitability of traders. (The findings were published in the Proceedings of the National Academy of Sciences -you can read more about it at newscientist.com) The scientists sampled the saliva of seventeen traders in London twice a day for eight days in order to determine how levels of testosterone affected performance. Their findings may offer clues for all investors and help explain why trading has sometimes been linked to thrill of other activities, like gambling.

The study showed that fear, confidence, greed and exhilaration can influence financial decisions, even among professional traders. But here is the interesting thing: the net result was those with elevated levels of testosterone when they started their days made more money than those who did not. As Coates noted, “The popular view is that experienced traders can control their emotions, but in fact their endocrine systems are on fire.” This does not mean that investors should run out and start taking testosterone supplements. As is the case with most things in life, excess may breed ill effects.

The research notes that over-the-top testosterone can lead to irrationality, which may help us understand the root cause of bubbles or manias. For most, the antidote to the exhilaration is another chemical that our bodies produce called cortisol. Of course while cortisol can bring a bit more rationality to decision-making, it can also make you too risk-averse and it may diminish brain activity over time. As my father would like to say, “Are those my only choices?” -- irrational exuberance or brain mush?

In the end, we have all known for some time that money is a wildly emotional topic. Because the science is there to prove brain behavior impacts financial decisions, it is imperative that all investors develop and maintain a disciplined system to keep those chemicals in check. If you can’t do it, hire someone who can. Otherwise your brain may lead to committing costly financial mistakes.