Trading on steroids

Some days I simply can’t stay focused, and Saturday was one of them. I watched the snow accumulate. I thought about what I really want to do when I “grow up,” a theme that recurs about as frequently during the day as do my dreams of approaching graduation a credit short or walking into the final exam of a course I never attended. In my dreams, by the way, I am not so much the panicked student as the unprepared brash risk taker who skates by. Enough said.

But perhaps not enough said, and this brings me to a book that is scheduled to be published by Penguin Press in June—The Hour between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust by John Coates. Well, clearly, I don’t have a copy of the book, but I took a look at the papers Coates published a few years back. For those who care about credentials, I’ll quote from Penguin Press’s summer catalogue: “Coates is a senior research fellow in neuroscience and finance at the University of Cambridge. After completing his Ph.D. Coates worked for Goldman Sachs, Merrill Lynch, and Deutsche Bank in New York, where he observed the powerful emotions driving traders. He returned to Cambridge in 2004 to research the effects of the endocrine system on financial risk taking.” His Cambridge faculty page has links to four short papers available online in .pdf format.

Coates’s key thesis is that “contrary to the assumptions of the rational expectations hypothesis, financial market equilibria may be influenced as much by traders’ biological traits as by the truth of their beliefs.”

Coates sampled male traders in the City of London, analyzing their steroid hormone levels. Among his findings, “a trader’s morning testosterone level predicts his day’s profitability, … a trader’s cortisol rises with both the variance of his trading results and the volatility of the market.” “[A]cutely elevated steroids may optimize performance on a range of tasks; but chronically elevated steroids may promote irrational-risk-reward choices.”

Interesting stuff, definitely worth a quick read. If the publisher is generous, I’ll have more to say on the topic this summer.