In addition to subprime mortgages, credit default swaps and lax government oversight, another factor may need to be added to the list of culprits responsible for the economic meltdown: testosterone.
A new study has found that men who were programmed in the womb to be the most responsive to testosterone tend to be the most successful financial traders, providing powerful support for the influence of the hormone over their decision-making.
"Testosterone is the hormone of irrational exuberance," said Aldo Rustichini, a professor of economics at the University of Minnesota who helped conduct the study, being published today in the Proceedings of the National Academy of Sciences. "The bubble preceding the current crash may have been due to euphoria related to high levels of testosterone, or high sensitivity to it."
Although it may come as no surprise that testosterone could be a big player in the mano-a-mano world of Wall Street, the research offers the best evidence yet of the hormone's role in determining which would-be Masters of the Universe will thrive. It also supports the growing recognition that biology plays a role in complex human behaviors, and that financial choices in particular are often less rational than economists appreciated.
"We have this idea that economic agents are like Spocks -- they are just rational," said John M. Coates of the University of Cambridge in England, who led the study. "This paper suggests the traders are surviving not so much because they are rational but because they have certain biological traits."
Several neuroscientists and economists praised the research.
"This is completely new and novel in terms of showing how sex hormones impact the brain," said Bruce S. McEwen, who studies hormones and behavior at the Rockefeller University. "It really brings in a biological basis for some of the things we see going on around us."
Coates became interested in how hormones affect traders when he worked on Wall Street during the 1990s. "I thought, from observing traders during the dot-com bubble, that some chemical was causing their irrationality," he said. "Since women seemed largely unaffected by the mania, a male chemical like testosterone became a natural suspect."
Coates reported in April that a study of 17 young male traders he conducted found that they tended to make more money on days that their testosterone levels were high, indicating that the hormone encouraged them to take more profitable risks.
The new study was aimed at investigating whether an innate sensitivity to the hormone was also at work, with some men having essentially been born to be traders by having been sensitized to testosterone in the womb. The researchers studied 44 male traders in London involved in "high-frequency" or "noise" trading, which requires intensely scanning economic data to make very fast trades involving large amounts of money.
To determine the traders' prenatal testosterone exposure, the researchers measured their "2D:4D ratio," the relative lengths of the index and ring fingers on the right hand. Those exposed to higher levels of testosterone in the womb tend to have relatively longer ring fingers.
When the researchers looked at the traders' profits over a 20-month period from 2004 to 2007, they found that the most experienced traders who had been exposed to the most testosterone in the womb earned about six times as much as those exposed the least. They also tended to have the longest careers, surviving about three years more on average.
"I was astonished when I saw the results," Coates said. "I nearly fell off my chair at the strength of the correlation."
When the researchers looked at 14 of the traders in the original study, they found that those exposed to the most testosterone in the womb were the most likely to make more money on the days when the amount of the hormone in the blood was highest, indicating that their profitability was driven by their sensitivity to the hormone as well as the amount of it.
The researchers also found that those exposed to the most prenatal testosterone tended to make the most money on days when the market was most volatile and decisions had to be made especially quickly. That indicates that in addition to the hormone's tendency to boost confidence and increase the appetite for risk, the sheer mental ability enhanced by early testosterone exposure is probably a key factor. Earlier research had found that those exposed to higher prenatal testosterone as indicated by 2D:4D measurements tended to be better athletes and musicians.
Whatever the mechanism, the findings lend support for regulating the markets differently and perhaps changing the ways traders are paid to encourage less focus on short-term profits, the researchers said.
"This shows that irrational exuberance has catastrophic consequences, like the ones we are witnessing in these months, not because of the irrationality of the single trader but because of loose regulation of the market," Rustichini said. "If regulations allow, for example, assets like subprime mortgages that give high short-term profits, traders will chase them."
Other experts agreed.
"The better we can understand how fear and greed are represented in individuals and how they react to market circumstances, the more likely we are to be able to avoid crises of these sorts," said Andrew W. Lo, professor of finance at the Massachusetts Institute of Technology's Sloan School of Management.
But Coates warned against trying to use the findings to screen potential traders, saying it would be difficult to apply the findings to individual traders. And there are always exceptions. But Lo said that if the results are confirmed and other biological traits that affect behavior are identified, they could lead to screening tests for traders.
"At this point that's still science fiction, but at some point science fiction will become reality," Lo said.