Rich and Co.

Financial Risk Taking and Testosterone – Set At Birth, By Family Genetics?

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Take Away: Individual differences in testosterone levels, set at birth by family genetics, likely determine investing behavior.

To the extent to which we can predict events that influence testosterone levels in individuals and in groups, we would be in a better position to predict the behavior of not only individual investors but also market economies. Many instances of unexplained collective phenomena, such as crowd effects or herd behavior have been documented in financial markets and it is possible that changes in testosterone at the group level may help us to better understand these observations.

Moreover, we provide strong evidence that it is testosterone change, rather than the act of winning or losing money, that influences future financial risk; a result that indicates that variation in risk preferences can be explained by individual variation in testosterone reactivity to social events, such as winning or losing money in a competition.

…accumulating evidence over the past two decades has demonstrated widespread effects of circulating testosterone on the social behavior of males in many species, including its effects on aggression, mate-seeking, dominance and profitability in men it has also, conversely, demonstrated that men’s testosterone levels respond to their social milieu and status. For instance:

  • testosterone rises during brief interactions with attractive women
  • with the anticipation of a social challenge or contests
  • Also, winners of competitive challenges often experience a relative increase in testosterone compared to losers; a differential response that primarily occurs in men and applies to physical competitions, such as tennis, non-physical competitions, such as chess and political contests and chance-based competitions such as coin-tosses.

Findings such as these suggest that testosterone acts as a physiological modulator of behavior, allowing male organisms to appropriately adjust their behavior to changing social environments. Males across a range of species engage in risky and competitive behaviors in response to increases in testosterone, particularly during the breeding season.

As an example, mating calls by males are risky because they expose males to increased risk of predation, but they also attract more females. Indeed, recent work also suggests that testosterone has motivational effects on human males to compete and take risks.

  • In athletes, pre-training concentrations of testosterone correlate with men’s voluntary workloads during training sessions.
  • Men are also more likely to perform physically risky stunts in the presence of attractive women and this increase in risky behavior is explained by rising levels of testosterone in the men.

In short, transient increases in testosterone work to promote socially competitive and risky behaviors in males, precisely when those behaviors are likely to be profitable and not when they are likely to be costly.

While the pathway through which testosterone produces its motivating and competitive effects are not clearly defined…greater activation of the nucleus accumbens is observed before individuals select risky relative to safe monetary gambles but this same activation is not observed prior to making safe relative risky monetary decisions. This behavioral plasticity to varying levels of testosterone likely evolved because it, on average, benefited males, but it is also possible that it could lead to irrational decision-making… if changes in testosterone influ-ence financial decision-making in men, this may help to explain a number of documented behavioral economic phe-nomena such as

(a) the house money effect (an increase in risk-seeking following a prior gain)

(b) increases in financial risk-taking by men following physical contact with a woman

(c) national stock market declines after a country’s sports team experiences a defeat

For example:

  • a lower ratio between the second finger and fourth finger (2D:4D, digit ratio), which is thought to reflect greater exposure to testosterone in utero has been associated with increased profits and risk taking in high-frequency traders.
  • Negative relationships between 2D:4D and financial risk have also been found in less specialized populations.

We contribute to this important body of research by focusing on the role of testosterone change in financial risk. Specifically, we investigate whether natural changes in testosterone, following wins and losses in a monetary competition, influence future financial risk-taking. Since there is much evidence that the magnitude of testosterone responses in men varies (Cohen et al., 1996; Pound et al., 2009) and that increases in testosterone influence other behaviors associated with competition and risk-taking, we hypothesize that individual differences in testosterone

…Here we demonstrated that individual differences in testosterone reactivity in response to a situational event are associated with financial risk-taking. Our result challenges the classical assumption in economics that preferences are stable within individuals and leads to testable predictions of how preferences may vary within an individual (and in groups) depending on context.

…research suggests that baseline differences in testosterone may account for differences in risk preferences between men and that male traders’ profits increase on days when their testosterone is highest, our findings are the first to directly link individual differences in testosterone reactivity to financial risk in men.

… it is not clear that men and women should react similarly to circulating levels testosterone:

  • Compared to men, women have less androgen-responsive neurons, rendering them less responsive to the behavioral influences of testosterone.

  • Likewise, critical periods of exposure to testosterone, such as in utero, are thought to have organizing effects on the brain affecting how individuals respond to the activating effects of testosterone. Accordingly, research examining the effects of testosterone change on behavior should ultimately be wedded with research involving testosterone exposure during other periods of development.


Written by Rich and Co.

May 5, 2015 at 5:39 pm

Posted in Uncategorized

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