Thursday, December 10, 2009

Have Studies Linking Trading Performance and Testosterone Encouraged Bad Behavior?

Original posted on Naked Capitalism by Yves Smith:

Readers may recall a 2008 study that found a link between testosterone levels and same-day trading performance. A typical summary:

John Coates and Joe Herbert from the University of Cambridge shadowed 17 male traders over 8 working days as they went about their business in a mid-sized City of London trading floor (the City is the capital’s financial district for the non-Brits among us). The bulk of their work took place between 11 am and 4pm, and at these times, Coates and Herbert took saliva samples to measure how their hormone levels shifted in a real-life situation. At the end of each one, the duo recorded how much profit and loss each trader had made…..

Coates and Herbert found that the traders were significantly more charged with testosterone on days when they beat their previous monthly average, than on those when they came under it. One trader, for example, enjoyed a 6-day winning streak that saw his profits soar to twice their historic average and his daily testosterone levels rise by 76%. And on days when the traders’ morning levels of testosterone were higher than normal, they made higher profits than days when they started off with low levels.

These patterns suggested that high testosterone levels lead to high profits.

Yves here. Aargh. Because I got plugged into the Canadian Sports Mafia (a loose association of Canadian doctors and coaches who consult to, train, and treat US pro teams and individual athletes), I got to know a Canadian doctor who is a world expert on dietary supplements. He does something pretty novel. He reads all the scientific research (I say that tongue in cheek because you’d be amazed at how many products are touted as having research behind them when they don’t). What is his first screen on the research? Whether the study is any good. Most are very badly designed, with a common failing that the sample size is too small.

That fits this study in spades. 17 guys over 8 days is too few observations. The Canadian MD would seldom consider anything that had fewer than 100 participants. Moreover, these men were ALL FROM THE SAME DEALING ROOM. You could have had intra-group dynamics playing a role and muddying the findings.

And later studies questioned the relationship, but they got less coverage:

Research by myself and my colleagues found that moderately elevated levels of this hormone increased the profits of high-frequency traders – although at higher levels it can cause overconfidence and risky behaviour, morphing traders into Masters of the Universe.

What we could not say, however, was whether testosterone was having its beneficial effects by increasing the trader’s skill or merely by increasing his appetite for risk.

In a study published on Wednesday in PLoS ONE we found that testosterone had little to do with trading skill. Traders with higher testosterone did indeed do better at this type of trading, because they took more risk. But there was no link between the hormone and their trading skills, as measured by the Sharpe ratio.

But traders were told that being a higher testosterone trader makes you a better trader. Let’s consider what being told one had a higher testosterone level produced in a different context. From the BBC:

Giving women more of the male hormone testosterone can turn them into fairer and more amiable game players…

So that old fashioned business about honor may have some distant foundation. But then get a load of this:

For the study, they asked more than 120 women to pair up and play an “ultimatum” bargaining game with real money at stake.

In the game, one of the pair is the “proposer” and is tasked with suggesting to the other player – the responder – how to split the money between them.

The responder can then only accept or reject the offer.

If they reject it, neither of the pair gets any of the cash.

The researchers gave the proposers either a dummy pill or one containing testosterone, but did not tell the women which pill they had been given.

Once they had played the game, the proposers were asked to say which pill they thought they had taken.
Those who received testosterone behaved more fairly, had fewer bargaining conflicts and were better at social interactions.

However, women who thought that they had received testosterone, whether or not they actually did, behaved more unfairly than those who thought that they had received placebo, again whether or not they actually did.

The researchers, led by Ernst Fehr of the University of Zurich, Switzerland, said the results suggested a case of “mind over matter” with the brain overriding body chemistry.

The study is by Nature and is firewalled. One could argue that if some women thought they received testosterone, there might have been a defect in the study implementation (it ought to be double blind, placebo controlled, but was it? Why would some women think they knew what they had received?)

But the other media coverage reinforces the conclusion that the stereotyping of testosterone-fueled behavior trumped its real effects:

They claim the results finally dismiss the myth – sometimes even used in court – that the sex hormone testosterone is the cause of much male aggression and anti-social behaviour.

However the popular belief that it makes you more ruthless and rebellious is so strong that if people believe they are taking the hormone they tend to fulfil their beliefs.

Now we can drive a truck through the reasoning here….a study on the effects of testosterone on women being applied to men? Ahem. But it certainly suggests that an separate study on men could be very revealing.

And it further suggests an interesting line of thought: if scientists demonstrate that testosterone-driven behavior is not aggressive, can we legitimately start to redefine what real macho means?

Personally, I never liked Master of the Universe types and we’ve had twenty plus years of celebration of that sort of behavior. I’d welcome anything that could undermine they cultural mythology that depicts it as attractive.

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