This is a great article from today's NY Times and a fun read if you have a moment. I knew testosterone was powerful, but I never thought that the presence of cortisol could change the world so dramatically. Yikes! Perhaps it can.
Will the down market never end? For months, policy makers around the world have tried bailouts, interest rates cuts, anything they could think of, really, to bring global markets out of their deepening depression. Once in a while, the markets do move up — only to fall again. Nothing seems to work for long.
Perhaps there’s a reason that everyone has overlooked: hormones.
If a research paper published earlier this year is correct, traders have become prisoners of their endocrine systems — testosterone, the elixir of male aggressiveness, during a bull market; cortisol, a steroid that helps the body deal with stress, when the bears take over.
The study suggests that raging hormones might explain why the men who rule the global markets send them rocketing up when they’re on a roll, and swooping down when they get scared, exhibiting judgment that can remind you of the guys in an Adam Sandler movie.
One investment strategist intuitively grasped the situation when he recently told The New York Times: “Normally markets are driven by fear and greed. Now it’s fear and fear.” In other words, instead of a rhythm of testosterone alternating with cortisol, it’s been cortisol and more cortisol for weeks. Actually there was a step in between — greed and greed, the bubble period. That’s when traders were making a lot of money, which made them pump out extra testosterone, grow overconfident and overcompetitive, and take on more and more risks that eventually went bust.
Now, in their funk, the lingering presence of cortisol makes them irrationally fearful, negative and risk averse.
It is an interesting theory, but I'd have to see a more convincing argument for the "male cortisol effect." As Dr. Cohen pointed out, correlation does not equal causation. At this point, it sounds a bit like male discrimination [say something about female hormones making us irrational and you *know* how that would go over. ;-)]. IMO, there'd have to be some kind of a study of men vs. women reactions (or low-testosterone vs. high-testosterone men) to make this argument convincing.
Perhaps a better explanation would be it's human nature to react in certain ways to positive or negative news -- and when the news is *repeatedly* one or the other, the financial and economic results cause a feedback loop.
Posted by: Bobette Kyle | November 19, 2008 at 05:36 AM