Israeli study links high testosterone to market bubbles

Increased testosterone levels on almost exclusively male traders’ floors could be responsible for market bubbles, according to a study published Wednesday by Israeli and Swiss researchers.

Psychological momentum — a state of mind where an individual or team feels things are going in exactly the direction they want — significantly affects men’s performance but not that of women and is known to be partly caused by changes in levels of the male hormone testosterone, said the study, published in the March issue of the Journal of Economic Behavior & Organization.

“We can connect our findings to the effect of psychological momentum in financial markets, where 90 percent of traders are men,” said Ze’ev Shtudiner from the Department of Economics and Business Administration at Ariel University, who carried out the study along with Alex Krumer of the Swiss Institute for Empirical Economic Research (SEW), University of St. Gallen, Switzerland, and Danny Cohen-Zada, a lecturer in Ben-Gurion University of the Negev’s Department of Economics.

“Such an effect may lead male traders, driven by an increase in testosterone due to a successful investment, to take exaggerated risks, which, in turn, create price bubbles,” he said in a statement released by the Ben-Gurion University of the Negev in Beersheba.

Shtudiner suggested that greater market stability could be achieved by upping the number of female traders on the floor.

“By increasing the number of women traders in financial markets, it may be possible to stabilize these markets since women have less dramatic shifts in testosterone levels, which can make them less prone to the momentum effect.”

In order to gauge how psychological momentum differently affects men and women, the researchers looked at they way they behave in judo contests.

According to Cohen-Zada, “The purpose of our study was twofold: to estimate the causal effect of psychological momentum on performance in real tournament settings, and to examine whether there are any gender differences in the corresponding response.”

The researchers took different samples showing the behavior of male and female judo competitors spanning the years 2009 to 2013. In the first, they focused on bronze medal fights. While all the competitors surveyed had won the same number of total bouts, some had won their most recent fight while others had not. The competitors who reached the bronze medal fight after winning their previous bout had a potential momentum advantage.

“Our results showed that based on a cross-section analysis of 106 men’s and 111 women’s fights from eight major annual judo events, having a psychological momentum advantage significantly increases the probability of winning in men’s contests but not in women’s,” said Krumer.

In the second part of the study, the academics surveyed 225 men’s and 231 women’s fights and got similar results by analyzing how the performance of the same pair of judokas were affected by varied momentum statuses in different tournaments. The results confirmed that the psychological momentum effect exists among men, but not among women.

Krumer noted that psychological momentum could be put to positive use.

“An increased frequency of positive feedback from managers after successful actions may turn into a positive psychological momentum and thus increase productivity. Similarly, managers should exert efforts to reduce the influence of unsuccessful actions of their workers to avoid productivity losses,” he explained.

Cohen-Zada recommended additional research focusing on the role of psychological effects on performance in male-dominated positions, such as stockbrokers, high-profile managers, politicians, and military commanders.