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Wednesday, January 21, 2009

Its All The About Testosterone

“Financial markets may be swung by testosterone.”

No way! My professors all guaranteed me markets were strong form efficient or at least some kind of efficient, back when I was a naive wide eyed student. The market knows everything all the time and has everything priced in rationally is what the textbooks said. Only a fool would try to time or beat or otherwise attempt to outsmart the market.

IT KNOWS!

One of them even told me trading with technical analysis was like driving a car forwards will looking in the rear view mirror. Another one insisted that my trading gains were nothing but random luck and that I was just on a lucky streak… a ten year lucky streak through two major booms, bubbles and busts.

Thank goodness the entire field of economics doesn’t rest on the assumption that individual economic agents act rationally and are always trying to maximize their utility in a consistent manner. Oh wait… doh!

[ sarcasm off ]

Best traders start to develop in womb: “Financial markets may be swung by testosterone, says a Canadian economist who found that high prenatal exposure to the hormone makes traders more successful.

John Coates, an Ottawa native teaching at the University of Cambridge, has found successful traders usually bear physical signs of high testosterone, which begins in the womb and continues in adulthood.

This gives them fast reactions, aggressive drive and stamina, causing them to trade partly with their hormones, like a tennis player making lightning-quick decisions at the net.

This is the same researcher who found last year that traders who have the highest levels of testosterone in a morning saliva sample will make the most money that trading day.

Coates once traded derivatives for Goldman Sachs, and later ran a derivatives trading desk for Deutsche Bank.

"It was while observing (traders) during the dotcom bubble that I realized economics had been missing something, that the traders during bubbles and crashes actually display clinical (medical) symptoms," he said.

In bubbles, there were "classic manic symptoms" among traders: racing thoughts, euphoria, less need for sleep, delusions --and a willingness to take "irrational" risks. And when markets crashed, traders had hangover symptoms, with high levels of cortisol, a stress hormone, and an irrational aversion to risk.

"There are two risks to the market," said Coates. "One is from people who can't control their runaway steroid feedback loops"--excessive highs in a bubble and lows in a crash.

"That can cause traders to make irrational decisions both in a bull and a bear market."

His new research was expected to be published Tuesday in Proceedings of the National Academy of Sciences, a research journal.

8 comments:

bankerhater said...

great article....its relevance again????

Economessed said...

Ben -- you had talked about what I'm going to comment about some while ago, and so I offer a follow-up. (Sorry, somewhat off topic -- figures from FRED):

At the start of 2001, total federal government debt (GFDEBTN) was $5.774 trillion dollars. As of September 2008, it was $10.025 trillion. But for the sake of appropriate comparisons, we’ll use the debt figures as of July 1, 2008 where we were only at $9.492 trillion. So between March of 2001 and this past July, we increased the Federal debt by $3.718 trillion.

During this same period, household debt (CMDEBT) outstanding grew from $7.352 trillion to $13.914 trillion – an increase of $6.562 trillion. Combining the Federal and household borrowings, we increased our debt obligations by $10.280 trillion over the past 7+ years.

In the first quarter of 2001, real gross domestic product (GDPC1) was $9.906 trillion. By July of 2008, GDP was up to $11.712 trillion – an increase of $1.806 trillion.

We borrowed $5.69 to get $1 of GDP growth over the past 7+ years. There's a Minsky moment for you.....

To put it another way, imagine you're a family farmer, and each day your family eats 5.69 lbs. of food. But each day, you only produce 1 lb of food. You can do this for a while (if you have adequate savings of canned food from previous years), but you can't do it forever. At some point, you must be able to produce AT LEAST 5.69 lbs of food to sustain that consumption rate.

And so we find ourselves in an untethered debt deflation spiral (coupled with increased saving and reduction in discretionary consumption). Which is why I'm so adamant that any "solution" which entails MORE borrowing and MORE consumption is doomed to fail.

Anonymous said...

I remember one of our idiot politicians in Florida was saying how testosterone made people smarter. I guess Chris Benoit was living proof.
p.s. Canadian are ugly and their mothers dress them funny

AKA_CES said...

RE --

"In bubbles, there were 'classic manic symptoms' among traders: racing thoughts, euphoria, less need for sleep, delusions --and a willingness to take 'irrational' risks. And when markets crashed, traders had hangover symptoms, with high levels of cortisol, a stress hormone, and an irrational aversion to risk."

=> If the best traders make money in both up and down markets, then why should their psyches be influenced by market directionality? Wouldn't it be success/failure, regardless of trade direction, that frames the mind ?

- Or is the implication that most successful traders are bullish on whatever they trade ? Would this not include commodities, where bullishness/bearishness would seem to be less a psychological bias than with equities ? -- i.e. a bear market in equities also coincides with the unhappy circumstance of recession in the economy, whereas the price of pork bellies likely has little psychological effect, except on those who raise hogs.

- Or, is the implication that the extreme outlier successful traders are mainly bullish on what they trade, and this skews the average ?

- Or, ... ?

Anonymous said...

I bet the study was performed pre financial crisis. I doubt the same traders would classify as successful today.

jh said...

the author of the study needs to read the book "Talent is overrated".

The book says that people become excellent at a pursuit by engaging in years and years of diligent practice.

It's that simple.

fajensen said...

@ AKA_CES

Or the best traders are those who manage by luck or through experience to hit the trend right in the ass, commit totally and just run with it - because the market and the financial system runs on noise and positive feedback.

Everyone can do that (and does) so the good traders are the ones that can not only enter a trade but also close their positions again.


Because:

Whenever a large trend starts the development is exponential until the system slams into the rails before the cycle runs the other way in exactly the same exponential fashion.

You can actually see it in the price movements: First the price/time is a linear ramp, then feedback kicks in, ths sucker goes exponential and we know it "is all over (eventually)".

The biggest percentage gains lie along the exponential part so even while "we know this ends badly" one simply *has* to be invested in it to compete.

The good traders design their trades so they can get out while the bad ones over-commit and get TARP funding by Uncle Sap!

Anonymous said...

People do get excited.