Decision-making, financial risk aversion, and behavioral biases: The role of testosterone and stress

Econ Hum Biol. 2018 May:29:1-16. doi: 10.1016/j.ehb.2018.01.003. Epub 2018 Feb 4.

Abstract

We examine the relation between testosterone, cortisol, and financial decisions in a sample of naïve investors. We find that testosterone level is positively related to excess risk-taking, whereas cortisol level is negatively related to excess risk-taking (correlation coefficient [r]: 0.75 and -0.21, respectively). Additionally, we find support for the dual-hormone hypothesis in a financial context. Specifically, the testosterone-to-cortisol ratio is significantly related to loss aversion. Individuals with a higher ratio are 3.4 times more likely to sell losing stocks (standard error [SE]: 1.63). Furthermore, we find a positive feedback loop between financial success, testosterone, and cortisol. Specifically, financial success is significantly related to higher post-trial testosterone and cortisol by a factor of 0.53 (SE: 0.14). Finally, we find that in a competitive environment, testosterone level increases significantly, leading to greater risk-taking than in noncompetitive environment. Overall, this study underscores the importance of the endocrine system on financial decision-making. The results of this study are relevant to a broad audience, including investors looking to optimize financial performance, industry human resources, market regulators, and researchers.

Keywords: Cortisol; Disposition effect; Risk aversion; Stress; Testosterone.

MeSH terms

  • Adult
  • Decision Making*
  • Female
  • Humans
  • Hydrocortisone / blood
  • Investments*
  • Male
  • Racial Groups
  • Risk-Taking*
  • Stress, Psychological / epidemiology*
  • Testosterone / blood*

Substances

  • Testosterone
  • Hydrocortisone