Do stress hormones fuel volatility in the markets?

LOS ANGELES — Do hormones drive volatility in world financial markets?

According to new research, chronically high levels of the stress hormone cortisol can alter the behavior of beleaguered financial traders, boosting their risk aversion and inspiring “irrational pessimism.”

In a paper published Monday in journal PNAS, researchers found London financial traders experienced a 68 percent increase in cortisol levels during periods of market volatility.

When researchers reproduced similar levels of chemicals in human subjects in the lab, they observed a “large” change in the study participants’ willingness to take on risk.

“Any trader knows that their body is taken on a roller coaster ride by the markets,” said study co-author John Coates, a former Wall Street derivatives trader who researches neuroscience and finance at the University of Cambridge. “What we haven’t known until this study was that these physiological changes — the sub-clinical levels of stress of which we are only dimly aware — are actually altering our ability to take risk.”

“It is frightening to realize that no one in the financial world — not the traders, not the risk managers, not the central bankers — knows that these subterranean shifts in risk appetite are taking place,” Coates wrote in a prepared statement on the research.

Risk and the willingness of humans to accept it are key focuses of economics and finance.

While games and experiments designed to measure risk aversion often assume people’s decision-making is consistent, Coates and his colleagues claim this is not the case. Physiological factors play a role as well.

Interestingly, while some studies concluded women are more risk averse than men, Coates and his colleagues did not find this to be the case in their study.

Study authors said based on their findings, the role of cortisol in world financial markets could be wide-reaching.

They speculated hormones might have exacerbated the credit crisis of 2007-09, when volatility in U.S. equities reached historically high levels.


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