Biology and financial instability

The molecules of mayhem

Testosterone and taking risks

May 26th 2012 | from the print edition

The Hour Between Dog and Wolf: Risk-Taking, Gut Feelings and the Biology of Boom and Bust. By John Coates.Fourth Estate; 310 pages; £20. To be published in America in June by Penguin Press; $27.95. Buy from,

THE financial crisis was caused by many things: greedy bankers, a glut of Chinese savings, shoddy regulation, an obsession with home ownership—take your pick. John Coates, once a trader on Wall Street and now a neuroscientist at Cambridge University, presents yet another culprit: biology, or, more precisely, the physiology of risk-taking. Financial traders, he says, are influenced by what is going on in their bodies as well as in the markets. Two steroid hormones—testosterone and cortisol—come out in force during the excesses of bull and bear markets.

Testosterone, “the molecule of irrational exuberance”, is released into the body during moments of competition, risk-taking and triumph. In animals this leads to something called the “winner effect”. A male that wins one battle goes into the next one primed with higher levels of testosterone, helping him to win again. Eventually, though, confidence becomes cockiness. The animal starts more fights and experiences higher rates of mortality.

Mr Coates thinks the exuberance that turns a market rally into a bubble may be fuelled by the same chemical. Some of this is based on traders he knew who became ever more convinced of their own invincibility during the dotcom era. But he also offers harder evidence. In one experiment Mr Coates sampled testosterone levels in traders in London and found that higher levels of the hormone in the morning correlated with beefier profits in the afternoon. Such profits came from taking higher risks, not greater skill.

Biology may also be responsible for worsening market sentiment in bad times. The body’s response to prolonged periods of stress is to secrete increasing amounts of cortisol, a hormone that marshals resources to cope with crises. Sure enough, Mr Coates finds that cortisol levels in traders’ bodies fluctuate in line with market volatility, even displaying a striking correlation with the prices of derivatives.

A burst of chemicals can be helpful. Good traders seem to produce a lot of hormones, but only for short periods of time. The trouble comes when cortisol remains in the body for extended periods. Rational analysis becomes harder, allowing emotional responses to gain the upper hand; risk aversion grows as testosterone production is suppressed. “During a severe bear market,” writes Mr Coates, “the banking and investment community may rapidly develop into a clinical population.”

One answer, he thinks, is to change the chemical make-up of trading floors by hiring older men and, especially, women. Their bodies release far less testosterone. Women have the same levels of cortisol as men, but their stress response is triggered less by competitive failures and more by problems in their personal lives. That may make them more resilient when the markets turn against them.

Mr Coates’s thesis is not entirely convincing. The experimental data are too scarce and the distinction he draws between the masculine world of risk-taking traders and the more feminised world of asset managers skips over the fact that many supposedly cautious, long-term investors made poor bets in the boom. But it makes intuitive sense that biological responses inform the mood of the markets. This book puts flesh on that idea.

from the print edition | Books and arts