In the midst of market volatility that knows no bounds, a new "study" comes out that, in essence, states that traders with higher testosterone levels make more money. The author of the study, John Coates, formerly ran the trading desk for Deutsche Bank, but now is a research fellow at Cambridge University. In the course of the study, he noted in his Financial Times comment piece "We found that a trader's daily testosterone levels were indeed higher when he made an above average profit. We also found that the higher a trader's morning testosterone, the more money he made that day. This effect was most pronounced in experienced traders."
However, also found in traders was cortisol, a stress hormone. As Coates says "we found that cortisol rose with the variance of the trader's profits. It also rose in lockstep with implied volatility in the options market, raising the intriguing possibility of a biological substrate for the derivatives market."
He goes on to say that "testosterone is likely to rise in a bull market and increase and exaggerate the rally....cortisol is likely to rise in a crash...."
Coates notes that a problem with long-term exposure to these hormones can result in traders becoming "price insensitive, blunting the instruments of monetary policy."
He then asks the question: if bubbles are amplified by testosterone, thus a male issue, should trading rooms be more diversified with women and older men?
Curious about this, I contacted some friends in the business to get their thoughts on this somewhat sensitive subject. Apparently, some were too wrapped up in their own testosterone to get back to me. Others were more accessible. One noted that he knows plenty of women who must have testosterone because he gets traded in all the time. Not exactly the point of the study, I said.
Another was more pragmatic and stated that people with higher competitive drives certainly would have higher testosterone and traders are competitive. "That could apply to anyone at the top of their game," he said. "Athletes, traders, even salesmen." I asked him if checking testosterone levels might be a new test to select money managers, better than, say a Sharpe ratio. He said no.
Finally I asked him what he thought of Coates' idea about mixing up the trading room; bringing in women to calm down the risk taking levels, dilluting the testosterone. He laughed. "That would be the ultimate volcanic explosion," he said. "They would go native."