News from the world of science with some pretty grim implications for the global economy as it currently exists: men — rational, level-headed, decisionmaking men — aren't actually very well equipped to handle important financial decisions at all; it's like they're getting the male equivalent of their periods, but all the time. In fact, men are so beholden to their volatile hormones that their prominence in the world of finance may actually doom the whole system to inevitable, testosterone-fueled collapse.
A new book postulates that the nature of financial markets combined with the physiological effects of testosterone make for a veritable clusterfuck of overreaction, which ends up exaggerating both good and bad news and artificially prolonging both booms and busts. This conclusion is based on research that analyzed traders' spit during several market sessions which found that men working in the high-risk, high-reward setting of the world of finance experience hormone fluctuations that could seriously interfere with their ability to make good decisions. Per Bloomberg,
This simple fact should have big implications for how we think about markets. Market participants aren't the rational automatons of most financial theory. They are biological organisms responding with a neural and physiological apparatus designed millions of years ago. If what happens in markets affects hormones, these in turn alter behavior and feed back into the markets.
In other words, The Invisible Hand exists, but it can't come to the phone right now because it's on some powerful pain killers after it got mad and smashed through a plate glass window and needed like 50 stitches. And actually, it might be more accurate to refer to The Invisible Hand as The Invisible Testicles.
While multiple male hormones can interfere with rationality, the two that seem to be the culprits of the economic roller coaster are testosterone and cortisol. Testosterone, which is farmed locally in the nutsack, creates what biologists refer to as "the winner effect." In the wild, it causes males lions who win fights with other males to become inflated with confidence, which can eventually lead them to feel invincible and do something dumb like wander alone through open space so a bunch of beta males can attack him. In the market, the hormone could cause men to think that they're unstoppable winning machines and take similar stupid risks, like, say, writing uncovered options or loading up on housing stock at the 2007 pre-crash market peak.
Another pesky side effect of temperamental hormones is cortisol, the hormone one's body produces during moments of fear and stress. Surprisingly, losing traders didn't feel daunted by losing tons of money like an animal may feel after being bested in an aggressive encounter, but they did start producing excesses of cortisol during periods of market volatility, which translated to a lingering, irrational fear of taking any risk at all. Hence elongated periods of stagnancy after periods of market nuttiness. Hence, now.
John Coates, the author of a new book on biology's role in market behavior, postulates that because of the biological inevitability of the sort of shenanigans that led to the 2008 crisis and every crisis that came before, it's silly to analyze the markets without taking into account how zany and hormone ridden men can be. But rather than proposing that trading decisions be outsourced to emotionless computers or algorithms, Bloomberg suggests a "testosterone index" to track the levels of hormones present in traders so that other traders have one more thing to freak out over. Financial markets are deeply flawed and subject to animal reaction. Solution: another index! This couldn't possibly backfire!
I usually give a hearty side eye to any research that suggests that because of hormones, humans are utterly incapable of controlling themselves; it's just as ridiculous to believe that men can't make grown ass adult decisions to keep their animal instincts in check as it is to assume that women are chronically mentally unstable because MENSTRUATION. But it's refreshing, in a schadenfreude soaked taste-of-your-own-medicine sort of way, to see The Man in the crosshairs for his hormonal impulses rather than being exonerated by them. Acknowledging a tendency is the first step to overcoming it, or working around it. In the meantime, I eagerly await the day we start seeing commercials for Testoster-OWN, a Midol-like pill for men who can't stop punching things.