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Researchers at the University of Cambridge hypothesise that this may be because testosterone has been found to increase confidence and appetite for risk – qualities that would augment the performance of any trader who had a positive expected return.

The influence of steroids naturally produced in the body (specifically testosterone and cortisol) may also provide insight into why people caught up in bubbles and crashes often find it difficult to make rational choices, unintentionally exacerbating financial crises.

Increased confidence and risk taking 

Testosterone is a steroid hormone which controls competitive encounters as well as sexual behaviour.

Testosterone in male athletes, for example, will rise prior to a competition and rise even further in a winning athlete - but decrease in a losing one.

This increase of testosterone in the winner can increase confidence and risk taking and improve chances of winning yet again, leading to a positive-feedback loop termed the ‘winner effect’.

Too much testosterone, however, can have a detrimental affect on the ability to assess risk rationally.

Trading history 

In order to determine how hormone levels affect those working in the financial sector, the researchers followed 17 City of London male traders for eight consecutive business days.

To measure the traders’ hormones, they took saliva samples twice per day at 11am and 4pm, times that fell before and after the bulk of the day’s trading. At each sampling time, traders recorded their profit and loss (P&L).

Using the trader’s previous trading history, the scientists determined a daily-average to which they could compare the test results.

They found that daily testosterone levels were significantly higher on days when traders made more than their one-month daily average than on other days.

Irrational decison-making 

The researchers also speculated that if testosterone continued to rise or became chronically elevated, it could begin to have the opposite effect on a trader’s profitability by increasing risk-taking to unprofitable levels.

Previous studies have shown that administered testosterone can lead to irrational decision-making.

They believe that this is because testosterone has also been found to lead to impulsivity and sensation seeking, to harmful risk taking, and in extreme cases (among users of anabolic steroids) to euphoria and mania.

Testosterone may therefore underlie a secondary consequence of the ‘winner effect’ in which a previous win in the markets leads to increased, and eventually irrational, risk taking in the next round of trading.

Highly stressful and competitive world 

Professor Joe Herbert, Cambridge Centre for Brain Repair, said that market traders, like some other occupations such as air traffic controllers, work under extreme pressure and that the consequences of the rapid decisions they have to make can have profound consequences for them, and for the market as a whole.

His team’s work suggests that these decisions may be biased by emotional and hormonal factors that have not so far been considered in any detail.

Herbert added that any theory of financial decision-making in the highly demanding environment of market trading now needed to take these hormonal changes into account as inappropriate risk-taking may be disastrous.

”Hormones may also be important for determining how well an individual trader performs in the highly stressful and competitive world of the market. We are now exploring this in much more detail,” Herbert explained.

Response to stress 

The researchers also examined the effects of increased levels of cortisol, a hormone which plays a role in our response to stress, on traders.

They found that it rose when the variance of the market and traders P&L rose. The results suggested that cortisol responds to economic uncertainty.

During the study, traders experienced acutely raised cortisol in association with higher volatility in the markets and the increased chances of making money that higher volatility brings.

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