How Trader Psychology Affects the Stock Market

What’s the Latest Development?

Researchers from Cambridge University, England, have found that market traders experience a significant rise in testosterone levels when faced with the prospect of making above-average profits. A surge of testosterone in the body also changes how the brain evaluates risk, making traders more likely to take bigger gambles, resulting in an unstable marketplace with more frequent booms and busts. “For the trader this is a moment of transformation, what the French since the Middle Ages have called ‘the hour between dog and wolf.'”

What’s the Big Idea?

By better understanding human physiology, we will gain a more complete picture of what causes market crashes and be better prepared to prevent them in the future. “Understanding the effects of human biology on the markets should profoundly change how we see them, and their pathologies,” said John Coates, a research fellow at Cambridge University and a former derivatives trader. “Risk management needs to dampen these biological waves, not amplify them.” One solution Coates proposes is to encourage banks to hire more women, who produce less testosterone than men. 

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