FINANCIAL troughs are exacerbated by investors stress hormone levels which rise during crises, discouraging them from taking the risks needed to reboot the economy.
British and Australian researchers have found new evidence that physiological factors, as well as economic judgments, contribute to financial market cycles.
Their study, reported in the journal PNAS, found that people became more risk averse when their cortisol concentrations rose.
The findings contradict assumptions that attitudes to risk are a “stable” personality trait, suggesting that physiologically driven shifts in behaviour have been overlooked as a source of financial market instability.
The researchers found that rising stress hormones could have contributed to widespread risk aversion — a phenomenon known as “irrational pessimism” — during the global financial crisis.
“If cortisol responds powerfully to increases in uncertainty and volatility, and volatility rises most strongly during a financial crisis, then risk taking may decrease just when the economy needs it most: when markets are crashing and need traders and investors to buy distressed assets,” the paper says.
The study measured people’s willingness to take risks in computer gambling games after daily hydrocortisone capsules had increased their cortisol levels by 68 per cent. This approximated the 67 per cent increase in cortisol measured in a 2008 study of London traders during the 2008 stock market slump.
Compared with participants who had taken placebo tablets, subjects proved far less willing to lay bets that offered high pay-offs but low probability of success.
Co-author Lionel Page, an economics professor at Queensland University of Technology, said the new study came in the wake of Cambridge University research linking high testosterone levels with risky investment behaviour during “bull” market phases.
He said the latest findings helped explain why traders turned to secure assets such as gold and the US dollar in tough times, and why countries like Italy, Portugal, Spain and Greece had found it so hard to obtain funding during the euro crisis.
“We naturally think that the movement of market prices is determined by rational assessments — the trade-off between risk and return,” Professor Page said.
“We found that there may be more going on. In a situation of crisis stress levels are going to rise, and this may have an effect on how (people) tend to assess risk. They can go from a moment where they are willing to take risks to another moment where they are not willing to take the type of risks they would have taken before.”
Professor Page said the findings could have implications beyond economics.
Source: The Australian
Comment: This is yet another comment about stress and cortisol, which we will see progressively more of in its relationship to behavioural disorders and mental distress.
But, should we be surprised with these findings?