When traders are on a winning streak, their testosterone levels surge, sparking such euphoria that they underestimate risk. When they are acutely stressed, the adrenal cortex produces a flood of cortisol, a hormone that can make them overly fearful and risk-averse.
Mr Coates says he was drawn to study these biochemical processes because he wanted to understand the âunbelievably powerful emotionsâ that make traders âgo crazyâ. In past experiments conducted on a London trading floor, Mr Coates saw cortisol levels in tradersâ saliva jump by as much as 500% in a day. Remarkably, cortisol increased in direct correlation to implied volatility, a measure of expected future variance in asset prices. âThe uncertainty is almost worse than the shock itself,â says Mr Coates. âItâs always a lot worse not knowing where the goddamn monster is.â
Cortisol prepares humans for danger, partly by helping the brain retrieve important memories. This early-warning system is invaluable in the wild. But raging hormones can eventually wreck investorsâ ability to think rationally. Chronic stress over weeks or months can produce so much cortisol that the brain focuses excessively on negative memories and perceives threats where they do not exist. This loss of judgment is exacerbated by other symptoms of stress, such as sleep deprivation.
Mr Coates likens this condition to the state of âlearned helplessnessâ identified in the 1960s by Martin Seligman, a psychologist who delivered random electric shocks to dogs constrained in harnesses. Eventually the animals lost the will to escape, even once they could do so.
Traders and rodents also seem to have something in common. Place a rat in an open field and its fear is obvious. Although visible symptoms of anxiety gradually disappear its cortisol levels remain elevated, showing that it is more stressed than it looks. Mr Coates has seen a similar phenomenon among traders. In questionnaires they displayed no awareness of the rampant stress indicated by their cortisol measurements.
