Endocrinal economics: hormones versus the market
John - We found that the traders, if they had high testosterone in the morning relative the the median levels, they made a lot more money for the rest of the day than they did on the days when they had low testosterone.Hormones and the Money MarketsMeera - When most people think of testosterone they obviously associate it largely with males. Does this then mean that females are relatively unaffected?
John - Women have about 10% of the testosterone that men do. It's entirely possible that they're not subject to this kind of overconfidence.
Meera - But you're also looking into levels of cortisol, as well.
John - That's right. In the current environment that may be the more interesting steroid. When the market turns around it turns into a crash what can happen is that cortisol, which is a stress hormone, can become elevated in the bodies of traders. Cortisol, if you're exposed to it chronically at high levels for a long period of time, it can have a devastating effect on both the mind and the body. In terms of affecting traders decisions what it can do is affect the memories you recall. You tend to recall bad memories, negative precedents. You tend to see risk where maybe there is none. You become fearful, you feel anxiety. I think that decreases a trader's appetite for risk. While testosterone is causing people to take too much risk cortisol is causing people to take too little risk in the crash.
the latest
latest episodes
I always thought this was why they called the selloffs panics. Fear sets in, people do stupid things. En Masse, humans act on emotion, not rationality. It's why crowds of people can do destructive things that individuals would probably not do. Over my lifetime, I've noticed that this is how the stock market works. At times, what to you and I would seem to be bad news will cause the stock market volume to display "excessive exuberance" and the Dow surges positive. It's like an internet meme gets loose, the sky's the limit, and now, we know, the testosterone kicks in, bringing hubris with it.
It's like being at a kegger with everyone kind of sloshed and then one of your buddies says, "I wonder what would happen if." I always was one of those that had that alarm go off in my head, "Oh No Not Again", as I would watch something incredibly stupid unfold with the beer induced testosterone poisoning.
We all knew mortagages were being handed out that had no backing. During this period I was being treated as a Cassandra because my friends knew that we were living in a new order where real estate pricing would always go up, the stock market and economic growth were endless.
I guess I'm paranoid, but when things are going too well, I kind of start to worry what's going to go wrong. Too many years as a mechanic and later as a computer tech dealing with reality I guess. I start feeling things are out of balance in these situations.
From the article:
"Economics is built on the assumption that economic agents are rational".
I've long argued that this assumption, which most economics models need to make in order to justify themselves, is a shaky, unjustified-by-the-evidence assumption.
"They take risks that are, quite frankly, stupid."
Which is why you need some sort of friction in the system, such as the Tobin Tax. Some (just about all, really) economists disagree with me:
From "A Securities Transactions Tax and Capital Market Efficiency" by Paul H. Kupiec:
"This paper revisits the debate on the securities transaction tax (STT). The analysis uses Tobin ( 1984 ) taxonomy of financial market efficiency to examine the potential effects of such a tax and concludes that a STT probably would not enhance the overall functioning of financial markets.
[OK, so it doesn't enhance it. Does it damage it?]
And from http://www.ucd.ie/bankingfinance/docs/marsh%20tobin%20tax.PDF :
"Empirical evidence on the effectiveness of securities transaction taxes is mixed at best and a neutral reader would probably conclude they do not serve their intended purpose."
A neutral reader could equally conclude that they DO serve their intended purpose - given the lack of evidence either way.
However, a STT could be used to pay off the inordinate, profligate debt accumulated by the neocons and their economic models.
Afterwards, we can put some of these people in jail. For negligence, at the very least. Things like murder and manslaughter also come to mind.
"Curiously enough, an edition of the Encyclopaedia Galactica that had the good fortune to fall through a time warp from a thousand years in the future defined the marketing division of the Sirius Cybernetics Corporation as 'a bunch of mindless jerks who were the first against the wall when the revolution came.'
- Douglas Adams The Hitchhiker's Guide to the Galaxy"
I've always thought that technical analysis was at its root a strategy of predicting investor mania. I do think it should be possible to develop computer or other models of the psychological effects that drive investors to do stupid things, and having a model of what stupid things investors will do, take the opposite side of the stupid trades they are about to engage in. I don't think I'm good enough myself to predict what stupid things others will do, but whenever I think about trading on "gut feeling" I know there's someone out there lining up to take the other side of that trade.
Two thoughts:
* Cause and effect reversed.
* Economics has no functional science, this is as god as anything.
knew a man who bankrupted himself and his company because he a so feared a diagnosis of diabetes he made his business decisions while half-crazed.
Hopefully he didn't try and sugar coat it for the employees.
nope,they all lost their jobs in the end because he was afraid of needles. The irony being that early diagnosis might have resulted in treatment by diet and lifestyle change instead of insulin injection...sounds like Detroit.
I'm more than a little skeptical as to the validity of this study. You know, correlation doesn't equal causation, and the possibility of cause and effect being reversed and all that.
Reminds me of the wonderful This American Life episode about testosterone.
The best advice I've ever gotten is not to underdetermine anything. It's interesting to try and tack economics onto a harder science, like biology, and I'm sure there's a strong relation between the mechanism (is that even a good analogy?) of the markets and the function of the human body, but it's almost certainly not a one-to-one relationship. There's more to the function of the markets than the secretions of a gland.
The recent plunge in the stock market is not a panic. It is a readjustment of expectations based upon factoring in rational information about the economy - a few of which are as follows:
1. People borrowed money they could not repay/ Banks lent money they will not get back.
2. A shift toward the left in the American electorate, implies potentially higher corporate tax rates; thus, lower returns to investors.
3. Americans will eventually have to stop being a net debtor nation and produce more than they consume - and it appears that day is coming soon. Lower consumption and higher savings will drag on corporate profits for a generation.
http://en.wikipedia.org/wiki/List_of_banking_crises.htm
Cycles happen because with inflation, savings is not enough. The value of your hoarded money will effectively decrease unless you find an 'investment' so rich(er) people try to find a way to make more money than they lose to inflation. Their haphazard and sometimes desperate investments drive a perpetual boom-bust cycle, as they try to find a 'win' or at least not a loss.
The free-market system is a great way to make expensive hardware that everyone wants cheap, but is a lousy way to manage the complexities of all economics.
maybe they should stop employing thick people.
I once saw it claimed that the Long Boom and the irrational rise in stock prices over the 1990s may have been partly if not wholly caused by raised levels of serotonin triggered by an increased uptake of antidepressants.
See, what Wall Street really needs is chocolate.
Great big slabs of it, distributed from carts on the trading floor.
If need be, force fed.
That, and puppies.
in the fifties and sixties, the execs were looped on three martini lunches, the seventies on sneaking doobies, the eighties powdering up, the nineties prescription anti-depressants, - accounts for a lot I suppose.
What have they been on the last 8 years I wonder...
meta mucil and apres moi le deluge.
ya know, come the end of the Great War, old, powerful types weren't popular. Too many young had been fed to the rats in trenches and the machine gun in no man's land. If the flu hadn't come along and ended the war, maybe there would have been a global revolution where betrayed youth lynched their leaders.
@#3
"I've always thought that technical analysis was at its root a strategy of predicting investor mania."
Agreed. I think anyone viewing financial markets as inherently rational is hopelessly naive. I always consider market sentiment as a key factor when I'm assessing risk exposure.
@17- Those effectively happen every so often. Not so much the mass lynching, but shoving grandpa out of the way and taking over to produce the new order that suits your generation perfectly.
Tragically, that order is going to be tyranny to the generation that follows...
And in other news, Obama appoints Alexander Shulgin as head of the new economic bailout plan...
#20: If only. Could we try spiking them with some of Grampa Shulgin's best, just to see what would happen? Please? Just for a little while?