Research grabs ‘Bulls of Wall Street’ by the horns

Paul Mayne // Western News

A research paper by Ivey Business School professor Amos Nadler, The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading, claims high levels of testosterone in males can lead to irrational trading, causing price increases and lead to over-pricing for stocks.

The over-exuberant rush certain males get from trading stocks, inadvertently causing prices to soar thanks to off-the-cuff decision-making, may be hormonal, according to a Western researcher.

Ivey Business School professor Amos Nadler said male traders with elevated testosterone levels cause significantly higher and longer-lasting asset overpricing when compared to traders with regular levels of the hormones. His researcher paper, The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading, was submitted recently to a business journal.

“It hit me one day that we don’t actually know how people make decisions. I knew economic theory could not account for the real behaviour we’re observing in our everyday lives – the idea that we are totally self interested, that we’re rational, that we have full information,” said Nadler, who conducted his doctoral work at the Claremount Graduate School’s Center for Neuroeconomics Studies.

“I wanted to know how we actually make decisions. But I think economics can actually do better by including other disciplines. Understanding biology, understanding neurophysiology, understanding genetics, they are tools that help us understand the world better, in the framework of decision-making. What can I learn from these other areas to help economics and finance do a better job?”

For this study, researchers took a group of 140 male traders, with an average age of 23, and gave 84 of them a testosterone gel. The remaining 56 received a gel containing no testosterone. At the end of each of 17 simulated trading sessions, participants were told they could cash out for real money. Unlike real-world trading, participants knew the asset’s value up front, but could try to sell it for whatever value they could get.

Nadler expected the testosterone group to be more active in bidding. However, he did not know if he would see prices rise or fall quickly, high volatility or a lot more trading volume.

“We found that in the placebo guys, their prices were tightly linked to the fundamental value. There was a little bit of over pricing, but that was to be expected,” Nadler said. “But when we looked at the testosterone side, it was crazy high. Hormones effect the way we behave; I just didn’t know it would be this dramatic. The whole reason I went to graduate school was validated through this study.

“The placebo group was really thinking through what they were doing – ‘If the asset was $100, then I’m going to bid $80 and will try and sell it at $120.’ They were behaving like an ultra-rationale person. These other guys were buying high to sell higher. It is not unrealistic, but it is a very risky maneuver. The bidding was so much higher.”

In the business world, you need to have a clear head, Nadler said. You don’t want to base your decisions off something that is not real. Once people learn what impacts their behaviours, perceptions, and beliefs, Nadler hopes people will be able to identify when they are being irrational with their decisions.

“Testosterone pushes you toward being less fundamental and more instinctive in thinking. In our world, that is typically not a good thing,” he continued. “When you are making financial decisions, you’re moving a lot of money. You want to think about what you’re doing. It’s hard, but you can train it.”

Nadler said the implications of his research include the need to incorporate intelligent policy and safeguards that integrate hormonally driven behavioral changes, such as responsive risk management systems. It is unknown if these results can be generalized to women; a closer examination of gender differences in financial trading would improve understanding of what drives financial markets and how to improve them.