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Hormones on the trading floor -

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Hormones on the trading floor

Equity markets have experienced wild swings lately. John Coates has been studying the behaviour of
traders and noted signs of mania. He wondered whether there were steroids involved to help explain
the market's often irrational movement.


Robyn Williams: It so happens that Kevin Rudd at the Prime Minister's Science Prizes night remarked
that at least here in science there would be no link to the Wall Street crash. I advised him
otherwise. If you're listening, Prime Minister, let's join Meera Senthilingam of The Naked

Meera Senthilingam: In light of the current economic situation I have come down to the city of
London to the trading floor of GFI Group. I've come here to find out what underlies the actions
taking place here to determine our market. Could human behaviour be playing a vital role in the
state of our economy? To help me look into this is John Coates from the Judge Business School at
Cambridge University who's here with now. So John, how do the markets really work?

John Coates: Essentially what we're doing in markets are buying and selling assets issued by either
private companies or the government, and the job of traders is to buy and sell these securities,
and in deciding whether to buy or sell them, they have to make an assessment of the return they're
going to make on these assets over the life of holding them, and the risk involved.

Meera Senthilingam: So you've been looking into the physiology of traders in the city of London.
What have you been looking into?

John Coates: We've been following up a hunch I had when I was working on Wall Street during the
'dot com' bubble. I was struck by the fact that traders at the time were acting very different from
the way they acted before the bubble and after the bubble. They were displaying classic symptoms of
mania; they were overconfident, they had racing thoughts, diminished need for sleep, and they were
carrying themselves in such an odd way I began to suspect that there was a chemical involved. The
second thing I noticed was that women were relatively unaffected by the frenzy surrounding the dot
com bubble.

During that time I was splitting my time between the trading desk and Rockefeller University in the
Upper East Side, and there I came across a very, very powerful model that's been tested in a number
of different animal species, and I thought this model may be applicable to the financial markets.
In this model (it's called the 'Winner Effect') two male animals go into a competition. Their
testosterone levels rise in preparation for this competition, and the winner comes out of that
competition with even higher levels of testosterone, while the loser comes out with lower levels.

The winner may go into the next round of competition with already elevated levels of testosterone,
and this can give him an added advantage; it has effects on muscles and the cardiovascular system,
but more importantly it affects his confidence and his appetite for risk. So he goes into this
competition with a slight edge.

It's what happens in the end game of this model that's really interesting. As the testosterone
levels build up in these male animals, they become overconfident. So, for example, they go out in
the open too much, they pick too many fights, they patrol areas that are too large and they neglect
parenting duties. So they suffer an increase rate of predation, and that's exactly what I was
observing in traders during the dot com bubble in New York; they took risks that were quite frankly

Meera Senthilingam: So how did you go about actually testing this in city traders?

John Coates: I got access to a trading floor in the city and we took salivary steroids from a group
of traders over a two-week period to test that steroids were in fact responding to the money they
were making and losing in the market and whether this in turn was affecting their trading

Meera Senthilingam: And what did you find?

John Coates: We found that the traders...if they had high testosterone levels in the morning
relative to their median levels they made a lot more money for the rest of the day than they did on
days that they had low testosterone.

Meera Senthilingam: When most people think of testosterone they obviously associate it largely with
males, so does this then mean that females are relatively unaffected?

John Coates: Women have about 10% of the testosterone as men, so it's entirely possible that
they're not subject to this kind of overconfidence.

Meera Senthilingam: But you were also looking into levels of cortisol as well.

John Coates: That's right. In the current environment that may be the more interesting steroid.
When the market turns around and turns into a crash, what can happen is that cortisol, which is a
stress hormone, can become elevated in the bodies of traders. Cortisol, if you're exposed to it
chronically at high levels for a long period of time, it can have a devastating effect on both the
mind and the body. In terms of affecting traders' decisions, what it can do is affect the memories
you recall. You tend to recall bad memories, negative precedence, you tend to see risk where maybe
there is none, you become fearful, you feel anxiety. And we think that decreases a trader's
appetite for risk. So while testosterone is causing people to take too much risk in the bubble,
cortisol is causing them to take too little risk in the crash.

Meera Senthilingam: So what do you think the current situation is now? Do you think that there are
going to be higher levels of cortisol in the traders at the moment?

John Coates: It's not only how far the market has fallen, but it's how long it's been falling. So
these traders have been under stress for almost a year and a half now. Their cortisol levels must
be elevated. There's a very good chance it's affecting their decisions.

Meera Senthilingam: And you were mentioning that long-term effects of cortisol will have
long-lasting effects on their minds' activity. Is this something that companies should think about?

John Coates: I guess so, yes, it's something the Bank of England should be thinking about.
Economics is built on the assumption that economic agents are rational, they respond to price
signals. So if you increase the price of something like money by raising interest rates, people
will stop buying securities, but they don't in a bubble. On the flipside, during a crash or a
depression they lower interest rates and economic agents are supposed to respond to that by buying
assets that look more attractive. But if these steroids are reaching such a level in our bodies
that we become price insensitive, then monetary policy may no longer work, and in fact that's what
we see.

Meera Senthilingam: And so do you think if the banks and the companies understood this physiology a
bit more, that they could work together, say, with neuroscientists to try and get out of the
economic situation that we're in at the moment?

John Coates: We're in a bit of a mess at the moment. Cortisol is a hormone that responds not just
to loss or injury ('loss' being in this case losing money), it also responds more powerfully to
situations of novelty, uncertainty and uncontrollability. And so within banks I think it's
extremely important, although very difficult to do of course, to create an environment that
minimises the traders' feeling of uncontrollability.

Managers think they have to be proactive, as they say in business speak, to show that they're doing
something to improve situations, and usually what they're doing is threatening to fire people and
that's exactly the wrong thing you should be doing. We need some positive shock to come into the
system of the very sort they're talking about right now, like the bail-out package passed in the US
last week and being discussed this week in Britain and Europe, to break this downward spiral of
risk preferences.

Robyn Williams: John Coates in London, he's a Cambridge scientist, with Meera Senthilingam.