Stress depresses markets
Stress hormones can depress financial markets, a new study suggests.
Rapid price fluctuations on the stock market, referred to as volatility, usually reflects market uncertainty and causes brokers and market-makers to become stressed.
Working with city of London financial traders, scientists have shown previously market conditions like these lead to the release of a stress hormone called cortisol, which, they speculated, might alter the way financiers do business and put the dampeners on the market.
Now, University of Cambridge researcher John Coates and his colleagues have shown, working with volunteers, that rises in blood cortisol levels equivalent to those experienced by traders during the 2007-8 global financial crisis, do indeed render individuals significantly more risk-averse.
In the new study, published in PNAS, thirty-six volunteers, 20 male and 16 female, were given daily doses of cortisol in a tablet to increase their levels by about 68%, or the same increase that had been documented previously in stressed traders.
Over an 8 day period, the volunteers participated in computer gambling tasks that offered them a choice between either a safer bet, with a guaranteed - albeit lower - return, or a riskier investment where the winnings were much higher but there was some chance of losing the stake.
The proportion of volunteers choosing the safe bet rose from 50% at the start of the study to 80% after the 8 days of elevated cortisol.
This shows, the team point out, that changes in stress hormones experienced by market makers during times of high market volatility appear to be sufficient to render individuals significantly more risk averse at the very time when markets are most in need of a stimulus.
The results also echo the observations that, at times of high market uncertainty, traders tend to favour less-speculative government-backed bonds and home market investments. The consequence, Coates and his colleagues have pointed out, is a tendency towards longer-term market depression.
The observation the team have made is important because, prior to now, in drawing up financial models used to make predictions, economists have always assumed a constant level of risk preference on the part of investors. This new study shows that this is not the case, so economists might want to take a gamble themselves and alter their thinking...