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Testing testosterone on the trading floor
17 APRIL 2008

Testing trader's testosterone
What does it take to make money in the second-by-second trading of stocks, options, futures, currencies and their arcane derivatives? Would you believe it's the venerable hormone testosterone?

That's the take-home from research on hormone levels in 17 male traders of London's financial district. These fellows spent the day staring at screens, buying and selling esoteric financial instruments like German interest rate futures, says John Coates, a researcher in the department of physiology, development, and neurosciences at the University of Cambridge, United Kingdom. "This type of trading is called noise trading, it's almost a branch of sports. You are looking for small price discrepancies, and those who get there first are the ones who get the trade, and make the half cent."

Testosterone helps athletes win.
Could it do the same for financial traders?

Shinny copper coin, with imprint of crown and words half penny.
Even if the trade produces a profit of a half-penny on the dollar, financial traders can make -- and lose -- big tubs of money in the course of a day's trading. Rabid market activity can cause a rise in the stress hormone cortisol. Wikipedia

The winning edge may be a matter of seconds, he says, but those ha-penny advantages can add up; some of the traders studied by Coates and colleague Joe Herbert took home 5 million pounds a year.

That sure is a golden noise, we're thinking. But what's the deal with hormones?

Profitable prediction
To explore the physiology of these traders, Coates and Herbert tested two common hormones: testosterone, the "male" hormone, which is associated with risk-taking, aggression, and success in sports, and cortisol, a stress hormone with equally broad physical and behavioral effects. They collected saliva at 11 a.m. and 4 p.m. for eight straight work days, and measured each hormone.

The testosterone results were plain: High testosterone at 11 a.m. tended to occur on profitable days. Since most of the day's trading occurs after 11 a.m., does that mean testosterone makes traders more profitable? Not exactly; the study only shows that hormone level and the profit tend to occur together; they are correlated.

Even so, Coates and Herbert wrote that a high testosterone level "predicts" success in the market. Testosterone levels have, for example, been linked to winning in other circumstances, primarily athletics. "If something comes before something else, and they are correlated, 'predictor' is the middle ground," says Coates. "You are one step past mere correlation, but not at causation."

Winner begets winner?
Coates suggests that the trading pit may even evince a positive feedback seen in the much better-studied athletic arena: Winning raises testosterone levels, which increase the fighting spirit and aggression that lead to further triumph.

Winning begets more winning.

Six computer screens display data, surrounding man seated at desk.
The world according to Wall Street. Somewhere, these screens hide an opportunity to make some money.
Will this fellow spot it in time? Does he do better when he has a lot of testosterone in his blood?.

Courtesy John Coates (plus header image)

In the traders, the testosterone level correlated with profit, so the same phenomenon may be occurring, says Coates. "When the traders made an above-average profit for the day, their mean daily testosterone levels are significantly higher. If we had more samples, we might see a feedback: Making money raises testosterone, which leads you to make more money, and that raises testosterone more. We think that is taking place, but we cannot say for sure."

In essence, the ancient hormone is doing its traditional job, says Herbert, a University of Cambridge neuroscientist with a particular interest in the way hormones alter brain function. "Testosterone increases competitiveness, aggressiveness, risk taking. That's what testosterone does. For males to achieve reproductive success, you need to take these risks. Now, an ancient biological system is working in a new, man-made environment."

Testosterone increases competitiveness, aggressiveness and risk-taking, helping males succeed in the reproductive arena. Has an ancient biological system adapted to a new, financial arena?

Counting cortisol
A second series of measurements concerned cortisol, a "stress" hormone that affects mood, memory and behavior, and which tends to rise in uncertain, uncontrollable and stressful circumstances (which sounds a bit like a losing stretch on Wall Street.)

Oddly, while the study did not correlate cortisol levels and losing days, cortisol did jump when the market was going through a particularly uncertain phase. And that may be appropriate, indicates Herbert. "Cortisol has massive effects on brain function, it makes you anxious, sometimes depressed, causes you to react more strongly to adversity, to remember adversity. It's a rather depressing hormone. Unlike testosterone, which says 'Get up and go,' cortisol says, 'Hold it steady. Do you really think you should be doing this?'"

Although the fallout from bankrupt banks and morbid mortgages is lambasting the financial markets, Coates, a former Wall Street trader who also teaches in the University of Cambridge's business school, does not plan to observe more traders. "We're going to be doing more lab work. It's sort of hard to sample traders now, they are a wreck. It would be fascinating, but we cannot find a trader or a bank to cooperate. The interest of a bank in pure research disappears at the first sign of a credit crisis."

Patch me in, Scotty
If the testosterone level "predicts" market success, should traders clamor for testosterone skin patches -- assuming pro athletes haven't cornered that market?

No, says Coates, who points out that these steroid hormones are tricky to control. "Steroids affect almost everything, there are receptors on almost every cell. I think I have managed to convince [the traders] how dangerous these steroids are."

Getting the desired behavioral response to testosterone can be tough, Coates says, since the nature of the response can depend on the dose. "Your own endocrine system is such a finely tuned system, and if you introduce testosterone from the outside, you cannot turn it on a dime. Even with the help of a doctor, you cannot replicate the natural rhythm of the endocrine system."

Adds Herbert, "like all hormones, there is an optimal range for both testosterone and cortisol in each person: too much is as bad for you as too little."

In one experiment, testosterone supplements caused gamblers to take extra risks and lose money, Coates says, while other tests show that it boosts confidence. And thus it could help markets run amok, he adds. "It struck me as likely that testosterone would be affected during bubbles. During the dot-com bubble, it was like the traders and the markets were on a drug."

We haven't a clue about making money in today's chaotic markets, but we do suggest keeping your hands out of the medicine cabinet.

-David Tenenbaum

• Endogenous steroids and financial risk taking on a London trading floor, John M. Coates and J. Herbert, PNAS, Apr. 22, 2008.

Related Why Files
Wall Street Weak
Testing Testosterone
Minding the Body
Steroid Story

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