The Role of Hormones in Financial Markets

Abstract

Steroid hormones, such as testosterone, have been shown to affect risk preferences in humans with high levels leading to excessive risk-taking. Hormone levels, in turn, are affected by trading outcomes as well as by gender -- males are more sensitive to stimuli than females. We investigate the effects of hormones on market behavior and trader performance. An increase in the proportion of female traders does not necessarily make markets less volatile; however, it reduces the occurrence of market crashes. Male traders on average under-perform females, although the best performing individuals are more likely to be male.

Keywords: Gender, Hormones, Endogenous risk preference, Market stability, Trader performance

JEL Classification: G10, G02, D02