Sunday, April 20, 2008

Sunday dollars+sense: Too much testosterone

Wondering what there’s too much of in your share portfolio? It could be testosterone.

When the share market was climbing, testosterone was thought of as a good thing. A Cambridge University study just published has found that during the upswing the more testosterone in a (male) share trader’s saliva in the morning, the more money he had made by the end of the day.

The author, John Coates - himself a former trader - believes that as the share market climbed last year increasing amounts of testosterone were pumped into the traders’ bloodstreams, making them increasingly confident and increasingly likely to take risks - pushing up the market even further.

Until it collapsed...

Coates says that then an associated steroid named cortisol took hold. It made traders jumpy, messed with their memories and see danger where it wasn’t. It exaggerated the downturn.

“In the present crisis, traders exposed for months now to the noxious effects of cortisol may end up in a psychological state known as learnt helplessness,” Coates writes.

They would have functioned better if they had been women.

Terry Odean and Brad Barber at the University of California have been studying the difference between men’s and women’s trading behaviour for 15 years.

They find that men are far more likely than women to impulsively trade rather than simply hold, especially single men. Unmarried men (presumably with raging hormones) are about two thirds more twitchy - two thirds more likely to buy and sell than unmarried women.

It’s a bad strategy. When Odean and Barber examined the accounts of 66,400 traders over a period of six years they found that the women, who traded the least, made 1.4 per cent more than did the men.

More strikingly, the single women made 2.3 per cent more than did the single men.

If you are surprised about that, Odean and Barber can understand.

They say men are more sure of their ability: it’s why they make stupid decisions. Women are less sure - that’s why they are less likely to do things that are rash.

So, if your investment advisor is a male, should you change him?

Perhaps. But don’t take it too far.

In New York a former trader named Andrew Tong is suing his employer SAC Capital for allegedly directing him to take female hormones as a way of making his trading “less aggressive”.

It’s not clear why they would have bothered. They could have just hired a woman.

John M. Coates and J. Herbert, Endogenous steroids and financial risk taking on a London trading floor, PNAS, Apr. 22, 2008.

Brad Barber,Terrance Odean,
Boys will be Boys: Gender, Overconfidence, and Common Stock Investment, Quarterly Journal of Economics, February 2001, Vol. 116, No. 1, 261-292.

Zubin Jelveh