Making too many impulsive trades? It's all the fault of your hormones

WALK onto any trading floor from the Square Mile to Wall Street and you will notice the sheer amount of testosterone in the atmosphere. Trading floors are filled with young men shouting either into a telephone or at their multitude of screens, intent on striking lucky and making their fortune. <br /><br />The male bias of many parts of the City has come under scrutiny recently. Many have blamed the financial crisis on risk-taking men. Harriet Harman famously quipped that if Lehman Brothers has been Lehman Sisters, then the investment bank would not have gone bust. <br /><br />The image of the City as a women &ndash;free zone is of course false. Plenty of women work for even thrusting parts of the City like investment banks and spread betting firms, but they tend to either deal with the clients or they become researchers. Not many become traders. So what can explain the lack of oestrogen floating around trading floors across the City? Are women just not built for it, or does it just not appeal to them? <br /><br /><strong>DEALER TO TRADER</strong><br />Nicola Poskitt is one of four risk managers at spread betting firm City Index, and the only woman on her team. Unlike some men entering the City trading floors today, Poskitt had never set out to become a trader and came across her first job as a dealer &ndash; a job where the gender ratio is fairly even &ndash; through an employment agency. <br /><br />Having worked in retail in the West End on leaving school, she went back to university to study computing and information systems &ndash; again, not typical female subjects. But she says that once she was working on the trading floor, she aspired to become a trader.<br /><br />She sees no difference in her attitude towards trading and risk compared to that of her male counterparts. &ldquo;I think that in trading as a full-time job, women do not have a very different view to the men,&rdquo; she says. &ldquo;You want to do your job as well as you can and that is what drives you, whether you are male or female.&rdquo; She says that it is a confidence thing, rather than a gender thing &ndash; &ldquo;you can get a man who is very cautious and a woman who makes very risky decisions.&rdquo; So why don&rsquo;t women want to work there? Not because they are not able, she says, but because &ldquo;they see it as a male-dominated environment.&rdquo; <br /><br />Gender might not be the factor, but hormones might still influence traders&rsquo; success, or at least their tactics. A recent study by researchers at the University of Chicago and Northwestern University in the US also suggests that hormones influence trading strategies. They found that female business students with higher levels of testosterone were more likely to go for risky financial deals when given the theoretical choice of a high-risk, high-return option and a guaranteed investment.<br /><br />Other studies have made similar findings. John Coates, a senior research fellow in neuroscience and finance at Cambridge University, conducted a real-life experiment back in 2007 on 17 male traders working on a mid-sized City trading floor. He and his colleague Jean-Marc Herbert found that a trader&rsquo;s morning testosterone level predicts his day&rsquo;s profitability. However, if testosterone continued to rise or became chronically elevated, it could begin to have the opposite effect on performance, because testosterone has also been found to lead to impulsivity and sensation seeking, to harmful risk taking, and, among users of anabolic steroids, to euphoria and mania.<br /><br />Coates says that the difference between male and female trading is down to how much time you have to make your decision. &ldquo;It appears to us that males excel at very short-term trading, where they hold their positions for a very short period of time. Women have much less inclination to do that and are more comfortable with trading that allows you more time to come to your decision and hold it,&rdquo; he explains.<br /><br /><strong>BETTER SUITED</strong><br />He suggests that, in general, women may therefore be better suited to asset management and other types of trading where portfolios are built, rather than the jumping in and out of the market that is typical of a City trading floor.<br /><br />In Coates and Herbert&rsquo;s study, it wasn&rsquo;t just testosterone that played a part in a trader&rsquo;s risk-taking decisions. Their cortisol levels responded to both their trading results and to the volatility of the market. But while elevated cortisol levels for short-periods of time can increase motivation and focus, if they persist can result in increased anxiety and produce a tendency to find threat and risk where none exist. <br /><br />Coates and Herbert concluded &ldquo;cortisol is likely, therefore, to rise in a market crash and, by increasing risk aversion, to exaggerate the market&rsquo;s downward movement. Testosterone, on the other hand, is likely to rise in a bubble and, by increasing risk-taking, to exaggerate the market&rsquo;s upward movement&rdquo;.<br /><br />Coates argues that women may even be less hormonal than men when it comes to financial trading and that it is important for stable markets to have both opinion diversity and endocrine diversity. &ldquo;If everyone has the same opinion then you can get violent moves one way or the other. And you also want men and women, young and old on the trading floor. If you have a more even balance then you would get a more stable market,&rdquo; he says.<br /><br />What does it mean for a trader? Well, there&rsquo;s not a lot you can do about your levels of testosterone. Male or female, the best advice is to remain disciplined, stick to your trading plan &ndash; risky or otherwise &ndash; and remain cool under pressure, however hard that might be. And if it all goes wrong, you could always try blaming your hormones. <br />