The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading

What is it about?

This paper is about the effects of testosterone on men's financial trading behavior and how that behavior affects market prices in experimental stock markets. We show that increasing testosterone in men causes them to overpay for financial assets and that this overbidding creates price bubbles (that eventually crash) and increase market volatility.

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Why is it important?

Behavioral endocrinology is an important field which started primarily in animal research and has shown that biology strongly influences social, reproductive, and economic behavior. Recently biological factors that influence human decision making have been explored yet most of the studies were correlational and did not provide clear cause-and-effect relationships. This experiment is the first to directly test the causal relationship between an influential hormone and an economically meaningful behavior in a controlled setting. The results, albeit in line with scientific and popular beliefs about testosterone and therefore not shocking, provide crucial insights about the behavioral effects of hormones as well as its consequences in dynamic financial markets. Also, co-incidentally, the drug used to elevate testosterone in the experiment is widely used by financial professionals, making our results even more broadly applicable than merely mimicking typical fluctuations in men. Most financial traders are male, and testosterone is a highly influential hormone that fluctuates males in response to various internal and environmental factors. This paper is vital to our understanding of how testosterone affects male financial decision making by showing a causal--not correlational--relationship between hormones and financial behavior and how that behavior affects financial markets.

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