Hormones such as testosterone are responsible for driving young male traders to take increasingly ill-calculated risks that turn bull markets into bubbles and even financial crises, according to neuroscientist and former Wall Street trader John Coates.

Coates, who is now a Senior research fellow in Neuroscience and Finance at Cambridge University, told the audience at DLD Women that biology had a major contribution to the global financial crisis. He said: "Every blow-up in a bank of $1 billion or more occurs at the hands of a trader at the end of a multi-year winning streak. You become euphoric, delusional and overconfident. You take way too much risk and there are terrible risk-reward trade-offs."

Coates and his team at Cambridge have been researching the psychology and biochemistry of high-frequency traders and believes that it is a huge oversight that no one has studied what happens to traders when they are on a winning streak just before a crash.


Coates believes that there is a Jekyll-and-Hyde transformation that these men experience pass when under pressure, which he refers to as "the hour between the dog and the wolf", a phrase he has also used to title his book on the subject.

Testosterone gets released into the body at points of competition, risk-taking and victory. In the animal kingdom, this leads to the " winner effect". This is where a male that wins a battle generates higher levels of testosterone, which in turn helps him to win again in the next fight. However, after a while, the animal surpasses the optimal level of testosterone and starts to become impaired and over-confident. "Animals go out in the open, pick too many fights, patrol areas that are too large and there are increased rates of predation. Risk taking becomes risky behaviour.

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That's exactly what is going on in Wall Street," Coates said.

Coates and his team have studied traders in London and found that higher levels of testosterone detected in the morning correlated with higher profits in the afternoon. These came from taking greater risks. "It sounds like an amazing mechanism", however, most hormones have an inverted-U shaped dose response curve. "Once you go over the top of the response curve, you start taking increasingly risky positions," he explained.


Cortisol is another hormone that can exacerbate problems in uncertain markets, according to Coates. Cortisol is a hormone that is released when under stress. In small doses it has a positive impact on the body, but if it persists it can lead to gastric ulcers, hypertension, depression and anxiety. Coates studied the correlation between cortisol levels and the levels of uncertainty in markets, in particular the German bond market. He found that the higher the variance in trading results, the higher the cortisol levels.

He explained: "So what we think is happening is that during a bull market, testosterone shifts traders' risk profiles to become overly aggressive, causing bubbles. In bear markets, stress hormones cause people to be too risk averse. Risk preferences are radically unstable in the financial world."

Coates and his team have theorised that if bubbles are caused by a testosterone feedback loop in young men, you could stabilise the financial markets by having more women and older men working in high-frequency trading positions, since they have a "very different biology with less testosterone", which could make them less prone to the winner effect. He noted that although women had the same levels of stress hormones, these were generally triggered by social stress rather than competitive stress, making them more resilient in the face of adverse markets. "So when it comes to making and losing money, women may be less hormonal than men."


Women represent just five percent of traders in trading floors.

A much higher percentage -- closer to 50 percent -- of asset managers are women. Coates puts this down to men's willingness to act on impartial information. "Women take a longer time to think it through." Asset management allows for a longer time to make decisions, and requires the confidence to hold a position for six months.

Coates revealed that he will shorty be publishing the findings of a new round of research on precisely this topic.