Page last updated at 21:39 GMT, Monday, 14 April 2008 22:39 UK

Hormones 'may fuel market crises'

City dealer
Does a macho culture cause problems?

Hormone surges among City traders could be partly responsible for driving "boom and bust" economics, say researchers.

A Cambridge University team found testosterone levels were directly linked to the profit they made.

The Proceedings of the National Academy of Sciences study also found levels of the stress hormone cortisol could affect the risks they took.

A psychologist who works with investment bankers said it may help explain seemingly irrational behaviour.

The Cambridge study measured testosterone levels in a small group of male City of London traders at both 11am and 4pm, and matched these to the levels of profit or loss recorded for that day.

They found that daily testosterone levels were significantly higher on days when traders made more than their average profit.

They ascribe this to the "winner effect", seen in sportsmen, in which success increases testosterone levels, which in turn increase feelings of confidence and ability to take risks, which then increase the chances of further profits.

However, if repeated too much, they say, the rising testosterone levels could eventually compromise their ability to make rational decisions, as the traders take bigger and bigger risks during so-called "bubbles", where the market rises sharply.

Prof Joe Herbert, one of the study's authors, said: "Our work suggests that these decisions may be biased by emotional and hormonal factors that have not so far been considered in any detail.

"Hormones may be important for determining how well an individual trader performs in the stressful and competitive world of the market."

'Learned helplessness

The researchers also looked at cortisol, which is produced in response to stress, and in the case of traders, extreme volatility in the markets.

In very stressful situations, some traders will just freeze
Jeremy Holt
Occupational Psychologist

Dr John Coates, another of the study's authors, said that while ever-increasing testosterone levels might turn risk-taking into an "addiction", the reverse was true with the stress hormone cortisol, which, in excess, causes people to actively avoid risk, potentially worsening the effects of any downturn.

"In the present credit crisis, traders may feel the noxious effects of chronic cortisol exposure, and end up in a psychological state known as 'learned helplessness'.

"If this happens central banks may lower interest rates only to find that traders still refuse to buy risky assets.

"At times like these, economics has to consider the physiology of investors, not just their rationality."

'In the Zone'

Jeremy Holt, an occupational psychologist who works with investment banks to coach their traders on the psychology of risk-taking, agreed that both scenarios fitted well with his experiences.

"Traders will often talk to me about being 'in the zone' - similar to a sportsman, meaning a feeling of 'unconscious competence', decisiveness and confidence.

"But it's amazing the number of times that traders put in a really good run but then hand a lot of their profits back because they have become over-confident, and didn't just stop when they needed to.

"They often come up with some strange, irrational reasons for doing this."

He added: "On the other hand, in very stressful situations, some traders will just freeze, and not do anything."

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