Decision-Making, Financial Risk Aversion and Behavioral Biases: The Role of Testosterone and Stress
Nofsinger, J., Patterson, F., & Shank, C. (2018). Decision Making, Financial Risk Aversion, and Behavioral Biases: The Role of Testosterone and Stress. Journal of Economics and Human Biology, 29, 1-16.
57 Pages Posted: 14 Aug 2017 Last revised: 1 Feb 2023
Date Written: November 23, 2017
We examine the relation between testosterone, cortisol, and financial decisions in a sample of naïve investors. We find that testosterone level is positively related to excess risk-taking, whereas cortisol level is negatively related to excess risk-taking (correlation coefficient [r]: 0.75 and -0.21, respectively). Additionally, we find support for the dual-hormone hypothesis in a financial context. Specifically, the testosterone-to-cortisol ratio is significantly related to loss aversion. Individuals with a higher ratio are 3.4 times more likely to sell losing stocks (standard error [SE]: 1.63). Furthermore, we find a positive feedback loop between financial success, testosterone, and cortisol. Specifically, financial success is significantly related to higher post-trial testosterone and cortisol by a factor of 0.53 (SE: 0.14). Finally, we find that in a competitive environment, testosterone level increases significantly, leading to greater risk-taking than in noncompetitive environment. Overall, this study underscores the importance of the endocrine system on financial decision-making. Broader implications of this study include, but are not limited to, investors looking to optimize financial performance, industry human resources, market regulators, and academia.
Keywords: Testosterone, Cortisol, Physiology, Stress, Risk Aversion, Disposition Effect
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