Undercover Economist

Stock market molecules

Testosterone may be the hormone for market manias, and cortisol for panics and busts

With a syringe in one hand, a pre-labelled test tube in the other, smelling salts in his pocket and a centrifuge and 30kg of dry ice nearby, Paul Zak advances upon a nervous bride, minutes before her wedding.

On a Wall Street trading floor, John Coates finds his “sober and prudent” subordinates gradually succumbing to a collective mania, clubbing until the early hours of the morning, surfing for porn on their workplace terminals and making ever more foolish financial bets.

Coates and Zak have much in common. Both trained as economists before becoming convinced that physiological factors were crucial in governing individual decisions and even the way economic systems work. Both have turned this research agenda into a hunt for economic influences at the molecular level.

For Zak, whose new book is called The Moral Molecule, the chemical in question is oxytocin. It was once associated purely with childbirth and breastfeeding. If you need to be convinced that the human body is to a large extent a chemically driven mechanical system, just stimulate the nipples of someone in the early stages of labour: with luck you’ll trigger the release of oxytocin and kick off a strong contraction. (I suggest asking for permission before you try this.)

But oxytocin is now associated with love and sex, and also with trusting and being trusted. It doesn’t take a genius to figure out why the female body would evolve a link between sex and trust, but it turns out the oxytocin hormone also regulates trusting behaviour in men. The link between national economic prosperity and levels of trust in a culture is strong; it is intriguing to know that the trust part can to some extent be bottled.

John Coates, meanwhile, has been on the hunt for the molecular triggers of financial manias and panics. His new book is The Hour Between Dog and Wolf; it alternates between war stories from the trading floor and a lucid discussion of human physiology. The two critical hormones in Coates’s investigation are steroids, hormones that have dramatic impacts not only on the body but the brain, too. If oxytocin is the moral molecule, testosterone may be the molecule for market manias, and cortisol could be the molecule in charge of panics and busts.

Bull animals such as rutting stags will experience build-ups of testosterone in anticipation of a fight with other males; if they win the fight, testosterone continues to build, fuelling aggression and giving animals an edge in future fights. Cortisol is a hormone that triggers physiological changes designed to deal with ongoing threats – cortisol can shut down the digestive system as the body breaks down stored glucose instead.

On the financial markets, the story is much the same: traders who are making money are also making testosterone, while a bear market is a breeding ground for cortisol. Both processes tend to self-reinforce, leading to sustained upswings or downswings in market psychology.

Females have a very different physiology when it comes to testosterone, of course – and Coates argues that banks should be bearing this in mind when choosing staff on a trading floor. When Harriet Harman was equalities minister, she famously mused that “Lehman Sisters” might have met a different fate; it was an odd comment given that Lehman Brothers’ chief financial officer was a woman – but perhaps she was on to something.

None of this will be easy for conventional economics to incorporate. Textbook analysis – and even some behavioural economics – assumes people have stable preferences. “Neuroeconomics” reminds us that your cognitive processes may vary depending on anything from whether you’ve recently had sex to whether you’ve recently eaten a sandwich.

Also published at ft.com.