Thursday, June 24, 2010

Of Testosterone and Risk Taking

Many a commodities traders made very risky decisions during the peak of the Bull Market, but how risky is too risky and most of all does testosterone play a role?

By: Ringo Bones

As the alleged “rogue trader” of Société Générale named Jérôme Kerviel faced charges in a Paris court back in June 8, 2010 over his risky trading decisions that cost his company billions. And Kerviel was even described by former Société Générale chief executive Daniel Bouton as a terrorist. But does the extremely risky trading decisions made by the former securities trader for Société Générale explained away by chemistry – as in testosterone?

John Coates – research fellow of University of Cambridge – explains his recent findings on the role of testosterone in crucial financial trading decisions. Traders – especially men – tend to take more risks when their testosterone levels are on the high side. It has been recently found out that the more money a male trader makes the more their testosterone levels rise due to the “reward effect”. Does this explain the very risky decisions made during the peak of the Bull Market?

The testosterone to reward link can be a very vicious cycle in the profit-driven environment of securities trading, especially when risky decisions – if one is lucky – gets overgenerous rewards while disregarding the long-term effects of excessive financial risk taking. In situations like these, financial risks should be analyzed by the logical aspect of the trader’s brain – as opposed to getting off on a short-term reward high of a pheromone-addled brain. The “sex-appeal” of ungodly amounts of easy-money acquired in high-risk securities trading or even CFD trading in a highly charged environment can usually increase male testosterone levels. Thus skewing ones perception of the true long-term profitability of most issued securities. Moral hazards don’t even get a look-in anymore.

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