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An unusual study of traders spit may offer a taste of the futurein how we understand what drives markets -- and why they aren t asstable and efficient as we might hope. Several years ago, two neuroscientists undertook an experiment on the trading floor of a major investment bank in London. Overeight consecutive business days, at both 11 a.m. and 4 p.m., John Coates and Joe Herbert took samples of saliva from the mouths of 17traders. With these samples, taken before and after the bulk of theday s trading activity, they measured the rising and fallinglevels of a number of steroid hormones, including testosterone,adrenaline and cortisol. The data revealed physiological changes not evident to the eye. Tobegin with, Coates and Herbert found that when traders did well andmade money, they didn t do it solely through cleverness andcerebral dexterity. Guts also played a role, although testicles would actually be more accurate. Traders performed better on daysin which they registered higher morning levels of the hormonetestosterone, which is mostly produced in the testes. This isn t actually surprising. After all, testosterone increasesthe level of hemoglobin in the blood, enabling it to carry moreoxygen. Experiments in both animals and humans show that it boosts searching persistence, fearlessness andappetite for risk, qualities that obviously help any trader exploitreal opportunities in the market. Athletes preparing for acompetition produce more testosterone, which helps bring them to anoptimal state of readiness for intense action. Something Unexpected The London experiments, though, also showed something unexpected. Levels ofthe hormone cortisol -- often called the stress hormone, because its levels rise in people experiencing severe psychological or physical stress -- didn t increase when traders suffered significant losses.Rather, they went up in direct proportion to the volatility ofrecent trading. The more wildly unpredictable the record of winsand losses, the more cortisol. In sufficient quantities, thehormone orchestrates a response to injury or threat by shuttingdown functions related to digestion and reproduction, even theimmune system. This simple fact should have big implications for how we thinkabout markets. Market participants aren t the rational automatonsof most financial theory. They are biological organisms respondingwith a neural and physiological apparatus designed millions ofyears ago. If what happens in markets affects hormones, these inturn alter behavior and feed back into the markets. As Coatesargues in a new book , our bodies may make us hard-wired for episodes of financial boomand bust. Biologists studying animals in the wild have documented a testosterone-driven dynamic called the winner effect. If twomale lions or bears fight over a potential mate, the level oftestosterone in the winner skyrockets afterward, while that of theloser plummets. This makes evolutionary sense, as the loser needsto rest and put energy into recovery, while the winner often facesimmediate challenges from other rivals. Ultimately, the winner effect can lead to trouble. By boostingconfidence and risk appetite, testosterone priming makes thatwinner more likely to win again, and successive winning can pushtestosterone to counterproductive levels. Indeed, researchers haveobserved a systematic tendency for animals to become so aggressiveand overconfident after a period of serial winning that they takestupid risks -- standing in open ground, for example, where theycan be seen and attacked by several rivals together. Giddy Energy In light of these findings, it s natural to suspect that a goodpart of the giddy energy and aggressive excitement that spills over Wall Street during a long bull market must reflect a surge in general testosterone levels, and thatbasic physiological mechanisms can drive financial bubbles. Themore markets rise, the more confident and risk-seeking traders andinvestors become. The ultimate outcome is a market of peoplelargely convinced of their own invincibility and ready to takeirrational risks confident in the outcome being yet anothervictory. When the bubble bursts, Coates argues, another hormonal responseamplifies the effects. The mental consequences of long- termexposure to heightened cortisol levels include anxiety, selectiverecall of disturbing memories and a sense of danger lurkingeverywhere. The market becomes irrationally risk-averse. The bear market persists as the financial industry, or much of it, becomes, inCoates s term, a clinical population unable to make the mostof the opportunities it finds. Now at the University of Cambridge, Coates turned to neuroscienceafter working for a decade at Goldman Sachs Group Inc. and DeutscheBank AG, where he ran a trading desk. Even before his experiments,his practical experience during the dot- com bubble convinced himthat the markets were running on something deeper thandispassionate reason. Normally a sober and prudent lot, as herecalls, traders were becoming by small steps euphoric anddelusional. They were overconfident in their risk-taking,placing bets of ever-increasing size and ever worsening risk-rewardtrade-offs. As much as traders and investors try to remainrational, will power is no match for steroids that work theireffects in every single cell in the body. It s rather amazing that biology has until very recently been moreor less excluded from economics. That error has deep roots in therationalist tendency to split brain and body and attribute behaviorto thinking, even when it has much broader origins. If themechanisms of our bodies and brains might play a major causal rolein the rhythm of financial boom and bust, it s time for financetheory to become more physiological. Coates makes a convincing case that physiology plays a central rolein driving markets, one that is generally overlooked. This insightmight well form the basis of new investment indexes, even funds,based on widespread real-time monitoring of the hormonalbiochemistry of the investing population. The moment for the testosterone index may have arrived. ( Mark Buchanan , a theoretical physicist and the author of The Social Atom: Whythe Rich Get Richer, Cheaters Get Caught and Your Neighbor UsuallyLooks Like You, is a Bloomberg View columnist. The opinionsexpressed are his own.) Read more opinion online from Bloomberg View. Today s highlights: The editors on why boring banking isn t safer and on voter registration in Florida ; William D. Cohan on watering down Dodd-Frank; Albert R. Hunt on November s election milestones; Simon Johnson on why the U.S. needs another systemic-risk watchdog ; Pankaj Mishra on the growing capitalism- democracy split ; William Pesek on Greece s effect on Asia ; Red Jahncke on a German exit from the euro; Jay S. Fishman on how to incubate small businesses. To contact the writer of this article: Mark Buchanan&cle; at buchanan.mark@gmail.com To contact the editor responsible for this article: Mark Whitehouseat mwhitehouse1@bloomberg.net. We are high quality suppliers, our products such as Condenser Tube Manufacturer , Freezer Tubes Manufacturer for oversee buyer. To know more, please visits Refrigeration Tube.
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