Cortisol shifts financial risk preferences. (2014).

“High levels of the stress hormone cortisol may contribute to the risk aversion and ‘irrational pessimism’ found among bankers and fund managers during financial crises

Narayanan Kandasamy, Andrew S. Powlson, Johann Graggaber, Mark Gurnell; Institute of Metabolic Science, University of Cambridge and National Institute for Health Research Cambridge Biomedical Research Centre, Addenbrooke’s Hospital, Cambridge United Kingdom

Ben Hardy, John Coates; Judge Business School, University of Cambridge
Lionel Page and Markus Schaffner; Queensland University of Technology Business School, Brisbane, Australia,
Paul C. Fletcher; Department of Psychiatry, School of Clinical Medicine, Addenbrooke’s Hospital, Cambridge, United Kingdom,
Proceedings of the National Academy of Sciences, 17 February 2014

High levels of the stress hormone cortisol may contribute to the risk aversion and ‘irrational pessimism’ found among bankers and fund managers during financial crises, according to a new study.

The study’s authors say that risk takers in the financial world exhibit risk averse behaviour during periods of extreme market volatility – just when a crashing market most needs them to take risks – and that this change in their appetite for risk may be “physiologically-driven”, specifically by the body’s response to cortisol. They suggest that stress could be an “under-appreciated” cause of market instability.

Published today in the journal Proceedings of the National Academy of Sciences, the study conducted at the Cambridge Judge Business School and the Department of Medicine’s Institute of Metabolic Science is the first to show that personal financial risk preferences fluctuate substantially, and these fluctuations may be linked to hormone response.

The finding could fundamentally alter our understanding of risk as, up until now, almost every model in finance and economics – even those used by banks and central banks – rested on the assumption that traders’ personal risk preferences stay consistent across the market cycle, say the authors.

Access the paper here: Cortisol shifts financial risk preferences

Read a review here: Stress hormones in traders may trigger ‘risk aversion’