‘How do hormones affect traders in financial markets?’
Could female traders reduce market crashes?
Researchers in the Department of Economics at the University of Leicester have shown that increasing the proportion of female traders makes the market more volatile, but at the same time can reduce the occurrence of the most extreme crashes. The research also showed that male traders on average earn less than their female counterparts but, as they were more comfortable taking bigger risks, the best performing individual overall was likely to be male.
Hormone levels in traders have been shown to be affected by whether a trade is profitable or not and males are more sensitive to this effect than females. This has led to policy makers, academics and the press to call for gender ratios in financial markets to be rebalanced in order to make them more stable. In the paper, entitled ‘The role of hormones in financial markets’, authors Subir Bose, Daniel Ladley and Xin Li considered the interactions of traders by creating a computer model to study the hormonal effects across the whole market. By using this approach, they were able to show that the physiological effects observed in individuals have surprising effects for markets as a whole.
Dr Daniel Ladley, Senior Lecturer in Finance in the Department of Economics at the University of Leicester and Deputy Director of the Leicester Institute of Finance, said: “It is important to note that the better performing male traders in these experiments were not more skilled, but made larger profits through riding their luck – decreasing their risk aversion, and so increasing their investment, in response to profits. The better performing female traders are less susceptible to these effects and so make extreme profits less frequently, but do lose less money. As such, hormone effects may explain why financial markets are dominated by men. Trying to rebalance the population of traders to better match that of the population as a whole may require a complete change in how financial firms reward their staff – a movement from large bonuses for the best performers to a system that better rewards consistent profits.”
He’s been telling Nathan Ifill how the mix of men and women trading in financial markets affects financial stability:
The paper can be downloaded in full from http://bit.ly/1QF9aK7.