GLOBAL - Experts have questioned the usefulness of research by the University of Cambridge which shows a direct correlation between levels of testosterone and cortisol present in traders' bodies and the profits they make.
"We know the emotions triggered by work and the emotional effects of testosterone have a huge effect on decision taking [but] I think it would be difficult to make practical applications from these findings," he said
The researchers concluded higher levels of testosterone led traders to take more risky, and therefore potentially more profitable, positions, while cortisol was shown to reduce risk appetite and inhibit trading.
Edward Collins, a fund manager with New Star Asset Management, said the results were hardly surprising and confirmed something many had thought for a long time.
"Ask any city professional, it's something that never comes to mind. When markets are in a bad way, they give you just as much adrenaline as when they are going well," Collins said.
Prof. John Coates, lead author of the report and a former trader, told Global Pensions: "It's true in a sense that it was a pretty obvious connection to make, but for the first time we have objective measurements in place."
He said prolonged exposure to hormonal steroids might lead to irrational or compulsive risk taking as the traders' judgement became clouded, with negative results.
Campbell added: "It's a bit of a chicken and egg situation really, you can't tell whether successful trades create chemicals or vice versa. It could be a kind of reinforcement method."
These 'feedback loops' go some way to explain 'herding' - mass confidence leading to a surge of risk-taking during bull markets, and chronic risk aversion during bear markets.
Coates said: "If the bigger picture is true - that people become price insensitive through prolonged exposure to steroids - it has much wider implications. It may explain why it's so hard to stop a bubble and why it's so hard to get out of a decline. It's an important contribution to neuroscience and economics."
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