Traders: Higher Testosterone, Higher Profits

Testosterone and cortisol, two hormones your trading performance may depend on. One makes us more likely to take risks, the other pushes us away from it.

John Coates, who previously ran a derivatives desk atDeutsche Bank in New York, has turned his pursuits towards understanding exactly what it is that drives our decisions regarding risk.Businessweek explains his method:

“He took saliva samples over a two-week period from 250 traders at a London firm, all but three of them men. At the same time, he tracked the profit and loss on their trades. He found that when a trader’s testosterone levels were particularly high in the morning, he went on to make more money than on days when his morning testosterone level was low. Coates calculated that on an annual basis, the differences between high-testosterone and low-testosterone days would add up to around a million dollars in take-home pay.”

It turns out that in many species there exists a “winner effect”, the resulting testosterone spike caused by a victory in some shape or form. In the most primal sense, animals that compete for females often experience this, with the winner’s testosterone spiking and the loser’s dropping tremendously.

 “The theory is that elevated testosterone levels in the bloodstream of the winner—which in some species last for months—will help him in his next bout. Testosterone doesn’t just boost confidence, it raises the blood’s oxygen-carrying capacity and lean-muscle mass. With each bout the process repeats itself: The winner’s testosterone level keeps climbing, making him fitter, stronger, and more confident, and raising his odds of winning.”

However this creates a problem, as the increased testosterone compounds to the point where the animal takes too large of risks, gets in unnecessary fights, and tries to control too much territory. For the losers, the same is true. The decreased testosterone makes them extremely risk-averse, and they are timid and cautious.

Juxtapose this scenario onto the trading floor. After all, despite being human, at the heart of things we are all still animals in nature, driven by the same chemicals that pump through their veins.

“One of the traders Coates studied went on a hot streak, making twice his average profit-and-loss ratio for five days in a row. By the end of it his testosterone levels had risen 80 percent. If Coates had followed the trader long enough, he believes, there was a good chance “he would be irrationally exuberant and blow up.”

For losers, the effect is the opposite: The stress and worry of losing money cause the endocrine system to flood the body with cortisol, which makes people afraid to take even favorable bets. In the wake of a financial crisis, it’s not just Wall Street traders who suffer from this, but anyone making decisions about money, whether it’s an employer who balks at hiring or a bank officer leery of making a loan even when the Federal Reserve is offering her free money to do so.

Given the role hormonal shifts play in decision making, what are some precautions traders could employ to avoid these pitfalls? One suggestion Businessweek suggests is “hormonal diversity”, making sure that women and middle-aged men (less testosterone) are better represented on the trading floor. Do you agree? What are some ways to beat the cortisol “slump” resulting from losses?


View this on WallStreetOasis here.


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