High levels of stresshormones might cause financial professionals to behave in ways that contribute to market crashes, a small, new study suggests.
Specifically, elevated amounts of the stress hormone cortisol may cause traders to avoid risk and be overly pessimistic when financial markets are extremely volatile. However, traders need to take risks to help struggling markets, according to the researchers at the University of Cambridge, in England.
“Any trader knows that their body is taken on rollercoaster ride by the markets,” study co-leader John Coates said in a university news release. “What we haven’t known until this study was that these physiological changes — the subclinical levels of stress of which we are only dimly aware — are actually altering our ability to take risk.”
The new study is thought to be the first to show that traders’ appetite for risk can vary greatly, and that these fluctuations may be due to stress hormone levels. Until now, most economic and financial models assumed that a trader’s personal level of risk acceptance remained the same through market ups and downs, the authors said.
Previous research showed that cortisol levels rose 68 percent among traders in London over a two-week period when there was high market volatility.
The new study included 20 men and 16 women, aged 20 to 36, who were given injections over eight days to raise their cortisol levels by 69 percent (similar to the rise seen in traders during the previous study). The participants also took part in financial risk-taking tasks in which they could earn money.
Initial increases in cortisol had little effect on the volunteers’ risk-taking behavior. However, long-term high levels of the stress hormone led to a 44 percent fall in their willingness to take extra risk for the possibility of a higher return, according to the study published Feb. 17 in the journal Proceedings of the National Academy of Sciences.
“It is frightening to realize that no one in the financial world — not the traders, not the risk managers, not the central bankers — knows that these subterranean shifts in risk appetite are taking place,” said Coates, an instructor at the university’s business school and a former Wall Street trader.
– Robert Preidt