Hormones Can Play a Big Role in the Stock Market’s Booms and Busts

The world of stocks and bonds may be revolutionized by a recent study, which shows that women may be able to reduce the number of market crashes.

Researchers at the University of Leicester’s Department of Economics have found that male traders earn less than their female counterparts, but they tend to take bigger risks.

The research also indicated that the increasing proportion of female traders may make the market more volatile, but at the same time can reduce the occurrence of the most extreme crashes. Big crashes, like the one caused by the housing bubble in 2008, can have extremely detrimental effects on the entire economy.

Previous research had shown that steroid hormones, like testosterone, affect risk preferences in humans. High levels of those hormones can lead to greater, and sometimes irrational, risk taking. One in four men over the age of 30 tend to have low levels of the hormone, but the other 75% could represent a significant portion of male traders.

Hormone levels have been shown to affect trading outcomes, and it seems that men are overall more sensitive to this effect than women. In recent years, policy makers, academics and the media have called for a re-balancing of gender relations in the historically and socially male-centered financial market.

According to the Daily Mail, the Leicester researchers created a computer model showing how markets would react when decisions were made at different hormone levels among the traders. It was found that high levels of the female hormones estrogen and progesterone showed consistent profits. While lower than the highest profits made by men, these instances carried less of a risk of making big losses.

Dr. Ladley, one of the study’s authors, said, “These findings have concerning implications for financial firms along with regulators and those wishing to change the gender balance in the financial markets.”

The study brings up a good suggestion for a change in incentive structure: instead of paying massive bonuses for the biggest profits, which encourages risk-taking, banks should pay more for consistent profit making — even if the individual amounts are lower.

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