Most professional stock market traders in the United States today are young males. Aside from a glaring lack of diversity, this gender imbalance in the financial industry may also cause instability in the stock market itself.
A new study published in the journal Management Science has shown a link between testosterone levels and rash decision making by stock traders. Testosterone is a hormone found in both sexes, but it is more prevalent in males, especially younger males.
To conduct the study, researchers from several major universities recruited 140 young men as their participants. These men then took part in a simulated market trading exercise. Before the trading exercise, the participants were either given a topical gel that contained testosterone or one that was a placebo.
The men bought and sold fake assets during the simulation, just as they would in a real trading environment. They also posted bids and performed other actions typical in the stock market trading industry. To make the simulation as real as possible, the participants’ performance was rewarded with real money.
The results of the experiment were quite revealing. The fake traders who received the placebo gel were less likely to take risks. They employed more traditional trading techniques, like buying low and selling high. But the men who applied the testosterone gel employed riskier strategies, such as buying high in the hopes they could sell at an even higher price later. It is this risky and aggressive behavior on the part of large groups of stock traders that can lead to market bubbles and instability.
The researchers say that this means that biology should be taken into account in professional settings like this, where risky decision-making can upset an entire economy. One of their suggestions is to implement a cool-down period before such decisions are acted upon so a more thorough evaluation of an assets true value can be made. Trading firms can also limit the amount of risk younger traders can take until they have built up a certain level of experience and maturity and have proven they are capable of making sound trading decisions.
Of course, another way to improve the stability of the stock market is to make sure there are more women involved on the trading floor. Other studies have shown that having more women involved in trading decisions helps the stock market stay in better balance.
Whether or not trading firms will actually act on these findings remains to be seen.