The Biology of Bubbles and Crashes

The Find: Recent research finds that male hormones might help explain the risk-taking behavior that underlies market bubbles and crashes
The Source: Research from the University of Cambridge in this week's edition of Proceedings of the National Academy of Sciences.

The Takeaway: Women are sadly familiar with the old sexist saw about hormones affecting our thinking, but perhaps it's men who let biology get in the way of rationality. Cambridge researchers pinned down 17 male City of London stock traders twice a day to take saliva samples and measure their hormone levels. More testosterone was found to be both a cause and an effect of greater risk taking. In the short term, more testosterone meant greater profits, but over the long term elevated levels of the hormone will lead to excessive risk-taking and financial losses. On the flip side, the scientists discovered that stressful market volatility led to elevated levels of another hormone, cortisol, which causes people to be risk averse.

Taken together the two hormones could help explain the excessive risk taking of bubbles (successful bets lead to more testosterone, which leads to more risk taking) and the the panicked fleeing towards the door after crashes. (Doped-up on cortisol after repeated set-backs, traders are unable to stomach even slight risk, no matter how much central banks lower interest rates).

Managers are not endocrinologists, but the study is a reminder to guys to be skeptical of claims that emotions play no role in your thinking. Acknowledging the impact of emotional cues on decision making is the first step towards correcting for them. Or you could just hire more women.

Jessica Stillman

Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.

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