LBS expert finds that hormones may perpetuate market volatility

Hormones may perpetuate volatility in the market

There exists a significant relationship between cortisol and financial uncertainty

Male dominated financial sector most affected

Gender diversity and wide-age demographics serve to mitigate the situation

Dubai, UAE, 14 March 2016: In his paper titled “Cortisol shifts financial risk preferences”, Guest-Lecturer of Organisational Behaviour at London Business School, Ben Hardy and his co-authors examine the relationship between hormones and financial uncertainty to find that volatility affects cortisol levels in individuals, causing higher stress. Cortisol is a hormone produced in response to uncertainty and pressure.

In periods of high volatility when uncertainty is greater, cortisol levels tend to rise, thus affecting an individual’s propensity to take risks, and actually making them risk-averse. The paper has been co-authored by  Narayan Kandasamy, Lionel Page, Markus Schaffner, Johann Graggaber, Andrew S. Powlson, Paul C. Fletcher, Mark Gurnell and John Coates, and also finds that men tend to overreact to small stimuli as compared to women.

Cortisol levels, and by extension risk aversion, are likely to rise when markets are volatile. Coupling this with the fact that most market players are men means that cortisol may exaggerate the market’s downward movement. “We found that men and women both take less risk when their cortisol levels are chronically elevated, for example by volatile markets.“ says Hardy “But men tend overreact to small changes in probabilities, and as most markets around the world are male dominated, then this may perpetuate the volatility, and hence the risk aversion, and hence the crisis.”

“In the Middle East, this same theory could be applied to the volatile oil market. In an industry largely dominated by men, the current volatility  could  trigger for higher cortisol levels for those working within the industry, with chronically elevated cortisol precipitating a number of health conditions” says Hardy.

Gender diversity and well-balanced age demographics can be employed as tactics to combat this situation. Stress hormone levels tend to decrease as people get older. Having a wider age-demographic, may balance out the tendency for over reactions to situations at work,” he says. “By employing a mixed workforce, industries will have a more balanced outlook and may provide a more measured response to situations that could trigger an overreaction due to higher cortisol levels in the blood stream.”