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Scientists have done a lot of work on the minds of Wall Streeters, most of which has lead to lots of comparisons to psychopaths/sociopaths… all kinds of ‘paths’, really.And while we try to balance this knowledge with our desire to treat all bankers as individual cases, we can’t help but get excited when new information comes out.
Enter scientists John Coates and Joe Herbert who, according to Bloomberg, did an experiment where they measured testosterone levels in 17 traders’ saliva before and after trading day activity. They then measured those samples for levels of testosterone, adrenaline and cortisol (the stress hormone).
Unsurprisingly, the study showed that traders made money, not just by using their brains, but also by following gut feelings. What is surprising, though, is how those feelings work. You might think that when a trader wins, he gets an adrenaline rush, and when he loses he’s got a rush of cortisol.
Not so. The brain takes more of a long view on these things. Cortisol is actually generated when trading is volatile and unpredictable (bear market) — testosterone when the market is predictable and solid (bull market).
When testosterone takes over, it can cause what is called ‘the winner effect,’:
Biologists studying animals in the wild have documented a testosterone-driven dynamic called the “winner effect.” If two male lions or bears fight over a potential mate, the level of testosterone in the winner skyrockets afterward, while that of the loser plummets. This makes evolutionary sense, as the loser needs to rest and put energy into recovery, while the winner often faces immediate challenges from other rivals.
Ultimately, the winner effect can lead to trouble. By boosting confidence and risk appetite, testosterone priming makes that winner more likely to win again, and successive winning can push testosterone to counterproductive levels.
On the other hand, when traders generate cortisol in excess, they can suffer from anxiety, selective recall, and paranoia. “The bear market persists as the financial industry, or much of it, becomes, in Coates’s term, a “clinical population” unable to make the most of the opportunities it finds,” says Bloomberg.
So what this means, say the scientists, is that the brain is wired for boom/bust cycles.
This might have been useful information at an earlier date.