From molecule to market: steroid hormones and financial risk-taking. (2010)

“We survey research on steroid hormones and their cognitive effects, and examine potential links to trader performance in financial markets. Preliminary findings suggest that cortisol codes for risk and testosterone for reward.

John M. Coates, Mark Gurnell and Zoltan Sarnyai

Little is known about the role of the endocrine system in financial decision-making. Here, we survey research on steroid hormones and their cognitive effects, and examine potential links to trader performance in the financial markets. Preliminary findings suggest that cortisol codes for risk and testosterone for reward. A key finding of this endocrine research is the different cognitive effects of acute versus chronic exposure to hormones: acutely elevated steroids may optimize performance on a range of tasks; but chronically elevated steroids may promote irrational risk-reward choices. We present a hypothesis suggesting that the irrational exuberance and pessimism observed during market bubbles and crashes may be mediated by steroid hormones. If hormones can exaggerate market moves, then perhaps the age and sex composition among traders and asset managers may affect the level of instability witnessed in the financial markets.

1. INTRODUCTION

Emotions are commonly viewed as subcortical eruptions impairing the rational guidance of behaviour. However, certain authors (e.g. Damasio 1994; LeDoux 1996; Loewenstein et al. 2001) have disputed this contrast, suggesting that rationality by itself would be overwhelmed and directionless were information not emotionally tagged for significance. Nonetheless, lapses of rationality continue to be blamed on emotional interference. This is especially true of irrational risk-reward choices made during financial market bubbles and crashes, choices considered by many as instances of irrational exuberance and pessimism overwhelming rational economic agency (Shiller 2005). However, there are grounds for believing that the emotions of euphoria and fear displayed in markets may be more accurately described as shifts in confidence and risk preferences, ones caused by elevated levels of steroid hormones.

Steroids are a class of hormone, hormones being chemical messengers sent from one part of the body or brain to another, bringing about a change in the target tissue. The major classes of hormones include amines (such as adrenalin and noradrenalin), peptides and proteins (such as oxytocin and leptin) and steroids (such as testosterone, oestradiol and cortisol). Steroids are lipids cleaved from cholesterol by a series of enzymatic modifications, with the major sites of biosynthesis being the gonads and the adrenal cortex, although some neurosteroids, such as pregnenolone, can be synthesized directly by neurons and glial cells in the brain (Baulieu 1997).

Steroids constitute a particularly influential class of hormones because of their range of action. With receptors in almost every nucleated cell in the body, they affect growth, metabolism, immune function, mood, memory, cognition and behaviour. Steroids are of special interest for the study of emotions and economic behaviour because they help coordinate body and brain in archetypical situations, such as fight, flight, mating, feeding, search and struggle for status. Because they are known to respond powerfully to such behavioural and social situations, steroid hormones may provide an important missing link in the emerging field of neuroeconomics between economic events and brain processes. Here, we review the relevant literature on two steroids that may help provide this link-testosterone and cortisol.

The full paper can be downloaded here: From molecule to market