High levels of testosterone could lead to stock market ‘bubbles,’ Israeli researchers say, and suggest that male-dominated financial markets should include additional women.

Research conducted at Israel’s Ben-Gurion University (BGU) has determined that psychological momentum significantly affects performance among male stock traders but not among women, which may account for exaggerated risk-taking in financial and business endeavors among men.

Psychological momentum is defined as a state-of-mind where an individual or a team feels things are going unstoppably their way, and is known to be caused, among other factors, by shifts in testosterone levels.

According to BGU researcher Dr. Danny Cohen-Zada, the purpose of the study was to estimate the causal effect of psychological momentum on performance in real tournament settings, and to examine whether there are any gender differences in the corresponding response.

Testosterone affects male performance in sports and finance

First, the researchers analyzed two different samples of men’s and women’s judo competitions from 2009 to 2013. They looked at the bronze medal fights of each tournament, and found that those who reached the bronze medal fight following a win have a potential momentum advantage.

The authors examined this unique setting to determine whether the contestants with the momentum advantage had a higher probability of winning the fight. Based on an analysis of 106 men’s and 111 women’s fights from eight major annual judo events, having a psychological momentum advantage significantly increases the probability of winning in men’s contests but not in women’s.

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The same psychological momentum was found in another experiment they conducted, based on 225 men’s and 231 women’s fights.

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Taking exaggerated risks creates price bubbles

The researchers believe that their findings have implications for business. “We can connect our findings to the effect of psychological momentum in financial markets, where 90 percent of traders are men,” study co-author Dr. Ze’ev Shtudiner of Israel’s Ariel University, said in a statement. “Such an effect may lead male traders, driven by an increase in testosterone due to a successful investment, to take exaggerated risks, which, in turn, create price bubbles.”

By increasing the number of female traders in financial markets, “it may be possible to stabilize these markets since women have less dramatic shifts in testosterone levels, which can make them less prone to the momentum effect,” he adds. “This argument is consistent with our results that momentum effects are generated only among men, since it is only among them that testosterone levels increase after success.”

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Given these findings, additional research focusing on the role of psychological effects on performance in male-dominated positions, such as stockbrokers and military commanders, would be beneficial, and could hopefully contribute to the inclusion of additional women in high-profile professions.

The study, titled “Psychological Momentum and Gender,” was published in the March volume of the Journal of Economic Behavior & Organization.

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