Investigating Wall Street through neuroscience

There’s a good collection of links on metafilter about decision-making in finance, and includes a bit about John Coates, who investigates the role of testosterone and cortisone in decision-making.  This article from Businessweek about how this ex-trader got interested in neuroscience:

The more Coates learned, the more he became convinced that traders were, as he put it, “a clinical population.” The stimuli of a trading floor triggered chemical changes in people’s brains, emotionally whipsawing them. During the tech bubble, he recalls, “People just really slipped their moorings: They were motor-mouthing, they weren’t sleeping, they were on this high. It was initially reasonable to assume it was cocaine, but I don’t know many traders that do that. There was something going on, it was just incredibly noticeable, and I realized that at times I had also felt that way.”

I think this is true not just about financial traders, but about anyone in a high-stress occupation during good times.  I know I get this way when everything is working perfectly in lab.

With enough victories, though, testosterone can reach levels that make the animal act foolishly. He picks fights he can’t win, tries to claim too much territory, and roams around in the open where predators might pick him off. A human being on a trading floor might take massive, risky bets on the strength of the American housing market or on U.S. corporate bonds. One of the traders Coates studied went on a hot streak, making twice his average profit-and-loss ratio for five days in a row. By the end of it his testosterone levels had risen 80 percent. If Coates had followed the trader long enough, he believes, there was a good chance “he would be irrationally exuberant and blow up.”

For losers, the effect is the opposite: The stress and worry of losing money cause the endocrine system to flood the body with cortisol, which makes people afraid to take even favorable bets. In the wake of a financial crisis, it’s not just Wall Street traders who suffer from this, but anyone making decisions about money, whether it’s an employer who balks at hiring or a bank officer leery of making a loan even when the Federal Reserve is offering her free money to do so.

Obviously, testosterone and cortisol have wider effects, and the effects they have are contingent on a lot of other environmental variables.  Studying testosterone and cortisol on the trading floor will elucidate just one (important!) aspect of their function.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s