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A Link Between Investment Biases and Cortisol and Testosterone Levels

A Link Between Investment Biases and Cortisol and Testosterone Levels

Posted May 14, 2020 at 2:26 pm


Financial markets are full of pricing anomalies, and their existence is often explained by human behavior. Behavioral finance postulates that cognitive irrationality is manifested in biases like the disposition effect (the tendency of people to sell assets that have increased in value, but keeping assets that have dropped in value in portfolio) or overconfidence bias (the tendency of people to be more confident in their own abilities). There are some papers which directly link investment decision making caused by these biases to actual physiology of investors (for example, a known impact of testosterone on investment performance). A new research paper written by Nofsinger, Patterson, and Shank examines not only testosterone but also cortisol levels of testing subjects and then compares their performance in a mock investment contest. Both hormones are strongly related to higher portfolio turnover and inability to accept losses, with cortisol levels even more significant than testosterone.

Author: Nofsinger, Patterson, Shank

Title: On the Physiology of Investment Biases: The Role of Cortisol and Testosterone



The underlying physiological mechanisms of biases are not well understood. As such, we examine the impact of testosterone and cortisol levels on several commonplace investment biases using realistic trading simulations. Cortisol, the biological marker of stress, is positively related to the disposition effect and portfolio turnover, which is consistent with the relation between judgment errors and stress in social settings. Testosterone, the male hormone, is also positively related to portfolio turnover, which is consistent with androgen-driven behaviors. Overall, the results show that the endocrine system plays a significant role during financial decision-making, that has important consequences for the financial industry.

Notable quotations from the academic research paper:

“Behavioral finance consistently shows that irrational decisions stem from cognitive errors and behavioral biases. For example, the disposition effect describes the situation in which investors hold on to underperforming assets for too long and sell overperforming assets too soon, resulting in diminished portfolio performance.

Behavioral biases appear to persist over time, even when those biases result in lower returns. One source of those cognitive errors is the individual’s underlying biological makeup. The psychobiological mechanisms underlying the disposition effect, portfolio turnover, and the vast majority of documented investment biases have rarely been studied. The related medical literature suggests that steroid hormones – notably testosterone and cortisol – play an important role in risk-reward decisions. This is particularly important in the finance industry, given that it is still very much a male-dominated, androgen-driven field, and given research showing that occupational stress is very high among finance professionals.

A Link Between Investment Biases and Cortisol and Testosterone Levels

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