Stressed city traders less willing to take risks, study finds

Study shows that rising levels of cortisol in financial workers during periods of market volatility changes their behaviour patterns

PUBLISHED : Tuesday, 18 February, 2014, 9:44pm
UPDATED : Wednesday, 19 February, 2014, 4:36pm


Do hormones drive volatility in world financial markets? According to research, chronically high levels of the stress hormone cortisol can alter the behaviour of beleaguered financial traders, boosting their risk aversion and inspiring "irrational pessimism".

In a paper published on Monday in the journal PNAS, researchers found that London financial traders experienced a 68 per cent increase in cortisol levels during several periods of market volatility.

When researchers reproduced similar levels of chemicals in human subjects in laboratory tests, they observed a "large" change in the study participants' willingness to take risk.

"Any trader knows that their body is taken on a roller coaster ride by the markets," said study co-author John Coates, a former Wall Street derivatives trader who researches neuroscience and finance at the University of Cambridge.

"What we haven't known until this study was that these physiological changes - the sub-clinical levels of stress of which we are only dimly aware - are actually altering our ability to take risk."

"It is frightening to realise 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."

Risk and the willingness of humans to accept it are key focuses of economics and finance.

While games and experiments designed to measure risk aversion often assume that people's decision-making is consistent, Coates and his colleagues say this is not the case. Physiological factors play a role as well.

Cortisol is secreted by the adrenal glands during times of stress. While the hormone can increase physical arousal, aid memory and help in learning, chronic, long-term exposure can impair the immune system, reduce mental attention and produce anxiety and depression among other effects.

Researchers began their study by testing levels of cortisol in London traders who were responding to erratic markets over a period of eight days. The traders revealed a 68 per cent increase over their mean daily cortisol levels, researchers said. In order to examine what impact elevated hormone levels might have on decision-making, researchers enlisted the help of 20 men and 16 women between the ages of 20 and 36.

Some of the group were given hydrocortisone pills - the pharmaceutical form of cortisol - while others were given placebos for a period of eight days.

During this time, the study subjects also played computerised lottery-style games in which they could win real cash.

Researchers found that while an initial increase in cortisol appeared not to affect decision-making, chronic and sustained cortisol levels resulted in a noticeable drop in their willingness to accept risky propositions.

High cortisol subjects exhibited a large reduction in their "risk premium" - the amount of additional risk someone will tolerate for the prospect of winning more money. Researchers said the premium dropped by 44 per cent for those who had elevated cortisol levels.

Interestingly, while some studies have found that women were more risk-averse than men, Coates and his colleagues did not find this to be the case .

Study authors said that based on their findings, the role of cortisol in world financial markets could be far-reaching.

They speculated that hormones may have exacerbated the credit crises of 2007 to 2009, when volatility in United States shares reached historic highs.

The study said chronic stress may have decreased risk-taking "just when the economy needed it most: when markets are crashing and need traders and investors to buy distressed assets".

"Physiology-induced shifts in risk preferences may thus be a cause of market instability that has been hitherto overlooked by economists, risk managers, and central bankers," the study authors concluded.

Depression risk

A saliva test for teenage boys with mild symptoms of depression could help identify those who will later develop serious problems, according to a British study.

Researchers measured the stress hormone cortisol in teenage boys and found those with high levels coupled with mild depression symptoms were up to 14 times more likely to suffer clinical depression later in life than those with low or normal cortisol levels.

"This is the emergence of a new way of looking at mental illness," Joe Herbert of the University of Cambridge and one of the study authors said. "You don't have to rely simply on what the patient tells you, but what you can measure inside the patient."

He compared the test to ones done for heart disease, which evaluate cholesterol and high blood sugar.

More than 1,800 teenagers aged 12 to 19 were observed and cortisol checked with saliva tests. Researchers also collected reports of depression symptoms and tracked diagnoses of mental health disorders.

The boys who had high cortisol levels and mild depression symptoms were up to 14 times more likely to suffer from clinical depression when compared to other teens with normal levels, while girls with similarly elevated cortisol levels were only up to four times more likely to develop the condition.

The study was paid for by the Wellcome Trust and the results were published Monday in Proceedings of the National Academie of Science.

Associated Press