Endogenous steroids and financial risk taking on a London trading floor

Abstract

Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice.

Fig. 1.

Trading desk.

Fig. 2.

Testosterone and economic return. Boxplot showing average profit and loss (P&L, y axis, £ sterling) made between 11:00 a.m. and 4:00 p.m. on days when subjects had 11:00 a.m. testosterone above (High) and below (Low) their median during the study. Individual data points are shown. Fourteen out of 17 subjects had higher P&L on high testosterone days than on low; the remaining subjects had negligible differences.

Fig. 3.

Cortisol and the variance of economic return. (A) Plot of mean cortisol (pg/ml) during the study for each trader correlated against the standard deviation of his profit and loss (P&L, logs). (B) Standard deviation of each trader's cortisol correlated against the standard deviation of his P&L (logs).

Fig. 4.

Group cortisol plotted against implied volatility of German Bunds. Implied volatility in most bond markets follows the calendar of U.S. economic statistics, rising during the week of Chicago Purchasing Managers Index (PMI), peaking on or just before the Employment Report, and dropping after the information contained in these numbers has reduced uncertainty over the state of the economy. The upper line is the daily cortisol level averaged from the group of traders (left axis, pg/ml; mean ± SEM, n = 11). The lower line is the implied volatility from German Bund (bond future) options with ≈1 month to expiration [right axis; Annualized standard deviation of the natural logs of daily price returns. Friday options (days 4 and 8) repriced to Sunday to eliminate the weekend effect. Bloomberg data]. Shaded bars display the importance of each economic release. The bars represent regression-derived day weights, i.e., the extra variance in Bund yields expected on that day due to the release of the U.S. economic statistic [lower left axis; basis points in yield change (12)]. The bars are for illustrative purposes only and do not enter into the statistical analysis. Implied volatility on day 5 was higher than expected, given the relative importance of the Chicago PMI, because the German market was surprised by the result of the French referendum.