Imagine you’re a stock trader playing the market. As you watch, it becomes extremely volatile, with prices swinging wildly from minute to minute. You have the opportunity to buy deeply undervalued assets or sell overvalued ones, with the potential of generating huge profits. But with such volatility, any decision to buy or sell brings the substantial risk of prices swinging in the opposite direction from what you’d hoped, making you look stupid (and lose tons of money) a few moments later.
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So what do you do? Your behavior—in terms of taking on or avoiding risk—has long been considered a matter of personal preference. But a series of lab experiments, described in a paper published today in Proceedings of the National Academy of Sciences, indicates that stock traders’ risk-taking behavior (or lack thereof) might be more powerfully affected by the stress hormone cortisol than previously thought.
“Any trader knows that their body is taken on roller-coaster ride by the markets,” John Coates, a neuroscientist at the University of Cambridge who co-authored the study and was a former trader for Goldman Sachs, said in a press statement. “What we haven’t known until this study was that these physiological changes—the sub-clinical levels of stress of which we are only dimly aware—are actually altering our ability to take risk.”
He and colleagues conducted a controlled lab experiment that sought to replicate the conditions of trading in a risky market. They recruited 28 volunteers and gave them hydrocortisone capsules (the pharmaceutical form of the hormone cortisol) daily for eight days, tailoring the dosage to increase their levels of the stress hormone by an average of 69 percent by the end of the period, the same amount of increase that the researchers had previously observed in actual traders stressed by volatile London markets. They also included eight volunteers who were given placebo capsules.
High levels of cortisol—produced by the adrenal gland and generally secreted in response to stress as a “flight or fight” reaction—can trigger a range of psychological and physiological effects in the human body. It releases glucose into the blood and increases blood pressure, readying the body for immediate action, but has been found to interfere with longer-term activities, weakening the immune system, slowing wound healing and hindering long-term memory and learning.
The researchers’ work with the cortisol-dosed participants suggest a previously unknown effect of the hormone—though one that also makes intuitive sense as an evolutionarily beneficial response to danger. The hormone, in this case, made the study volunteers especially aversive to taking on risk.
image: https://public-media.smithsonianmag.com/filer/cd/e0/cde049a0-93a6-44ed-8854-34d7084c8e55/lottery_charts.png
lottery charts.png
(Image via PNAS/Kandasamy et. al.)
In the study, the participants were asked to choose between playing one of two lotteries that paid out real money. Option A, on the left, offered the certainty of a payout of at least 30 pounds, and a small chance at winning 90 pounds. Option B, on the right, offered the chance of winning no money at all, but a much greater chance of winning 90 pounds.
On the whole, the expected return (the value of each potential payout multiplied by the odds of actually getting it) is higher for option B, but it’s also riskier, because the participant might get nothing. Other experiments have established that most people will choose option A, unless the expected return of option B gets so high that it becomes irresistible. If option B included a payout of a million pounds, for instance, it’s easy to imagine that you might pick it despite the risk—but as long as the payouts are relatively similar, people like to choose the risk-free option. The point at which you’d switch from option A to option B indicates how risk-averse you are.
The researchers found that after people were dosed with cortisol for one day, they were slightly more risk-averse than the control group, requiring mildly higher disparities in expected return to push them over to the risky option. But they became dramatically more risk-averse over time: After eight days of taking the hydrocortisone, they chose risk-free lotteries nearly 80 percent of the time (as compared to 50 percent for the control group). On the whole, their risk premium (the amount of risk they were willing to put up with in exchange for the chance of a higher payout) fell by 44 percent.
Additionally, within the experimental group, increases in blood cortisol levels (as measured by blood and saliva tests) varied slightly—the researchers sought to cause everyone’s levels to increase by 69 percent (the same as the real-life traders’), but there was some variation. Tellingly, those that had levels of the stress hormone increase the most grew most risk-averse.
The most interesting aspect of all this is that the researchers sought to replicate the blood cortisol trends they observed in real London stock traders, stressed by a volatile market: chronically rising over the course of a week or so, rather than spiking for a day and settling back down. The participants’ risk-averse behaviors didn’t show up until cortisol levels had similarly grown over time.
Admittedly, it’s a small sample size, but if real-world traders behave anything like the study participants, the researchers argue, then cortisol could be acting as substantial (and underappreciated) factor in the behavior of traders, making them especially risk-averse when volatile, stressful markets persist for a week-long duration. During especially long-term periods of volatility—Coates points to the 2007-2009 financial crisis, when volatility in U.S. assets went from 12 percent to over 70 percent—cortisol levels and risk-averse behavior might rise even more than demonstrated in the study. He claims that one of the factors that exacerbated the crisis was the fact that so many investors were unwilling to take on risk and buy distressed assets—a behavior that perhaps could be traced, in part, to cortisol.
This sort of biological analysis of market behavior, Coates says, is much needed—part of the reason he switched from trading derivatives to investigating the body chemistry behind investment decisions. “Traders, risk managers and central banks cannot hope to manage risk if they do not understand that the drivers of risk taking lurk deep in our bodies,” he said.
In September 1789, President George Washington assigned Alexander Hamilton the task of solving the nation’s debt. As Secretary of the Treasury, Hamilton had exactly 110 days to prepare a report on the nation’s credit status, which he would present to Congress in January.
This was a daunting assignment, to say the least. Between foreign, domestic and state debts, the United States owed almost $80 million, due in large part to the pay and supply of the Continental Army. Current income from federal tariffs and excise taxes amounted to just $4.4 million, enough to cover current government operations. Adding to the complexity of his task, the French were now in trouble politically and financially, and an unknown number of original bond owners had sold their government debts to speculators.
All solutions seemed to have roadblocks. If Hamilton shrugged off the debt as a responsibility of the Confederation, no lender would ever loan to the U.S. again and the country would remain an agricultural appendage of Europe. If he paid only notes and debts still held by their original owners, he would threaten small merchants and open the government up to case-by-case decisions. And if he paid off the debt entirely, he would need to impose the kind of taxes that had sparked Shays’ Rebellion two years prior.
When it came time to present to Congress, Hamilton suggested that the United States look at debt not as a problem, but as an asset. He proposed to fund the debt through a gradual schedule of dependable tax resources, assume state debts as a measure of good policy, and generate new revenue through western land sales and taxes on luxuries—notably, booze.
His report spurred an uproar. Original bond owners and speculators cannot be viewed as the same, cried James Jackson of Georgia! The whiskey tax would be “odious” to farmers, yelled Aedanus Burke of South Carolina! Others came to Hamilton’s defense. “The science of finance is new in America, and perhaps the report’s critics don’t understand quite what they’re asking for,” said Fisher Ames of Massachusetts.
Debate raged until June, when finally the House passed a bill incorporating his recommendations. The Senate agreed a month later, and the effects on public credit were immediate. U.S. government securities tripled in value, thanks to the assurance that they would be funded, handing Americans $30 million in capitalization that had not existed before. Riding this wave, Hamilton decided to implement part two of his plan.
In December 1790, he submitted his proposal for a national bank. While his report would stabilize the nation’s credit status, he said, the United States needed a bank to create an active economy. This proposal was met with an even fiercer round of critics. Here, James Madison parted company with Hamilton, arguing that the enumerated powers of the government did not include the authority to create a bank. Perhaps no one opposed Hamilton as vehemently as Thomas Jefferson. The new Secretary of State was so passionately anti-national bank that he wrote Washington a letter arguing his position. A bank, he penned, represented a boundless field of power and constitutional overreach.
Fortunately, while Jefferson had Washington’s one ear, Hamilton had the other. Drafting his own letter to the President, he argued that there was a natural relationship between the institution of a bank and several enumerated powers of the government. For instance, the bank would act as an instrument to expedite the processing of receipts, collection of taxes and regulation of commerce. Above all, Hamilton said, to deny the power of the government to add ingredients to its plan would be to refine away all government.
After studying Hamilton’s letter for a day, Washington signed the bill for a national bank on February 25, 1791. While a victory for Hamilton, it marked an ominous note of division in Congress. Fisher Ames, the representative from Massachusetts, astutely observed in a letter to a friend that an invisible line had formed between members of Congress through the ordeal, settling into something of a North-South divide:
“To the northward, we see how necessary it is to defend property by steady laws. Shays confirmed our habits and opinions. The men of sense and property, even a little above the multitude, wish to keep the government in force enough to govern.
At the southward… A debt-compelling government is no remedy to men who have lands and negroes, and debts and luxury, but neither trade nor credit, nor cash, nor the habits of industry, or of submission to a rigid execution of law.
They have continued antis, and have assiduously nursed the embryos of faction, which the adoption of the Constitution did not destroy. It soon gave popularity to the antis with a grumbling multitude. It made two parties.”
sumber: https://www.smithsonianmag.com/science-nature/how-stress-hormones-impact-behaviors-investors-180949768/
https://www.smithsonianmag.com/sponsored/alexander-hamilton-debt-national-bank-two-parties-1789-american-history-great-courses-plus-180962954/
The researchers found that after people were dosed with cortisol for one day, they were slightly more risk-averse than the control group, requiring mildly higher disparities in expected return to push them over to the risky option. But they became dramatically more risk-averse over time: After eight days of taking the hydrocortisone, they chose risk-free lotteries nearly 80 percent of the time (as compared to 50 percent for the control group). On the whole, their risk premium (the amount of risk they were willing to put up with in exchange for the chance of a higher payout) fell by 44 percent.
Additionally, within the experimental group, increases in blood cortisol levels (as measured by blood and saliva tests) varied slightly—the researchers sought to cause everyone’s levels to increase by 69 percent (the same as the real-life traders’), but there was some variation. Tellingly, those that had levels of the stress hormone increase the most grew most risk-averse.
The most interesting aspect of all this is that the researchers sought to replicate the blood cortisol trends they observed in real London stock traders, stressed by a volatile market: chronically rising over the course of a week or so, rather than spiking for a day and settling back down. The participants’ risk-averse behaviors didn’t show up until cortisol levels had similarly grown over time.
Admittedly, it’s a small sample size, but if real-world traders behave anything like the study participants, the researchers argue, then cortisol could be acting as substantial (and underappreciated) factor in the behavior of traders, making them especially risk-averse when volatile, stressful markets persist for a week-long duration. During especially long-term periods of volatility—Coates points to the 2007-2009 financial crisis, when volatility in U.S. assets went from 12 percent to over 70 percent—cortisol levels and risk-averse behavior might rise even more than demonstrated in the study. He claims that one of the factors that exacerbated the crisis was the fact that so many investors were unwilling to take on risk and buy distressed assets—a behavior that perhaps could be traced, in part, to cortisol.
This sort of biological analysis of market behavior, Coates says, is much needed—part of the reason he switched from trading derivatives to investigating the body chemistry behind investment decisions. “Traders, risk managers and central banks cannot hope to manage risk if they do not understand that the drivers of risk taking lurk deep in our bodies,” he said.
In September 1789, President George Washington assigned Alexander Hamilton the task of solving the nation’s debt. As Secretary of the Treasury, Hamilton had exactly 110 days to prepare a report on the nation’s credit status, which he would present to Congress in January.
This was a daunting assignment, to say the least. Between foreign, domestic and state debts, the United States owed almost $80 million, due in large part to the pay and supply of the Continental Army. Current income from federal tariffs and excise taxes amounted to just $4.4 million, enough to cover current government operations. Adding to the complexity of his task, the French were now in trouble politically and financially, and an unknown number of original bond owners had sold their government debts to speculators.
All solutions seemed to have roadblocks. If Hamilton shrugged off the debt as a responsibility of the Confederation, no lender would ever loan to the U.S. again and the country would remain an agricultural appendage of Europe. If he paid only notes and debts still held by their original owners, he would threaten small merchants and open the government up to case-by-case decisions. And if he paid off the debt entirely, he would need to impose the kind of taxes that had sparked Shays’ Rebellion two years prior.
When it came time to present to Congress, Hamilton suggested that the United States look at debt not as a problem, but as an asset. He proposed to fund the debt through a gradual schedule of dependable tax resources, assume state debts as a measure of good policy, and generate new revenue through western land sales and taxes on luxuries—notably, booze.
His report spurred an uproar. Original bond owners and speculators cannot be viewed as the same, cried James Jackson of Georgia! The whiskey tax would be “odious” to farmers, yelled Aedanus Burke of South Carolina! Others came to Hamilton’s defense. “The science of finance is new in America, and perhaps the report’s critics don’t understand quite what they’re asking for,” said Fisher Ames of Massachusetts.
Debate raged until June, when finally the House passed a bill incorporating his recommendations. The Senate agreed a month later, and the effects on public credit were immediate. U.S. government securities tripled in value, thanks to the assurance that they would be funded, handing Americans $30 million in capitalization that had not existed before. Riding this wave, Hamilton decided to implement part two of his plan.
In December 1790, he submitted his proposal for a national bank. While his report would stabilize the nation’s credit status, he said, the United States needed a bank to create an active economy. This proposal was met with an even fiercer round of critics. Here, James Madison parted company with Hamilton, arguing that the enumerated powers of the government did not include the authority to create a bank. Perhaps no one opposed Hamilton as vehemently as Thomas Jefferson. The new Secretary of State was so passionately anti-national bank that he wrote Washington a letter arguing his position. A bank, he penned, represented a boundless field of power and constitutional overreach.
Fortunately, while Jefferson had Washington’s one ear, Hamilton had the other. Drafting his own letter to the President, he argued that there was a natural relationship between the institution of a bank and several enumerated powers of the government. For instance, the bank would act as an instrument to expedite the processing of receipts, collection of taxes and regulation of commerce. Above all, Hamilton said, to deny the power of the government to add ingredients to its plan would be to refine away all government.
After studying Hamilton’s letter for a day, Washington signed the bill for a national bank on February 25, 1791. While a victory for Hamilton, it marked an ominous note of division in Congress. Fisher Ames, the representative from Massachusetts, astutely observed in a letter to a friend that an invisible line had formed between members of Congress through the ordeal, settling into something of a North-South divide:
“To the northward, we see how necessary it is to defend property by steady laws. Shays confirmed our habits and opinions. The men of sense and property, even a little above the multitude, wish to keep the government in force enough to govern.
At the southward… A debt-compelling government is no remedy to men who have lands and negroes, and debts and luxury, but neither trade nor credit, nor cash, nor the habits of industry, or of submission to a rigid execution of law.
They have continued antis, and have assiduously nursed the embryos of faction, which the adoption of the Constitution did not destroy. It soon gave popularity to the antis with a grumbling multitude. It made two parties.”
sumber: https://www.smithsonianmag.com/science-nature/how-stress-hormones-impact-behaviors-investors-180949768/
https://www.smithsonianmag.com/sponsored/alexander-hamilton-debt-national-bank-two-parties-1789-american-history-great-courses-plus-180962954/
