Bad market? Blame it on testosterone

The other day a friend was venting about her husband.
She was not referring to his peccadilloes but his financial maneuverings that were turning out to be a potential fault line in their relationship. She swore that if he had only followed her suggestions, they would have been much wealthier. When she did cite specific examples, I could not help but agree.  

At that time, I recollected a statement made by Jonas Ridderstrale when he wondered what the state of the world would have been if Lehman Brothers was instead Lehman Sisters and founded, not by Henry, Emanuel and Mayer, but Henrietta, Emanuelle and May. While the names are an original, he was actually echoing Christine Lagarde’s statement that if Lehman Brothers had been Lehman Sisters the crisis would have had a different complexion. 

Which makes me wonder, is too much of testosterone bad for investing? 

Doug Hirschhorn, a trading psychology coach, wrote a piece in Forbestitled Think like a woman and make more money. He once said to a journalist, that at his workshops on Wall Street, he has to “literally deconstruct a lot of their testosterone”. Hirschhorn believes that significant behavior, which can be classified as dominant male traits, is actually counterproductive to success in trading such as being too aggressive, stubborn or ego driven which results in not knowing when to cut losses and sell. 

Remember Ralph Cioffi and Matthew Tannin, once heavyweights of the hedge fund world? During the trial, the prosecution referred to their internal emails.
"The subprime market looks pretty damn ugly," Tannin wrote to Cioffi. He added that if the report was "anywhere close toaccurate," they should close their hedge funds immediately, because "the entire subprime market is toast."
"I’m fearful of these markets," Cioffi wrote to a colleague in March 2007. "Matt said it’s either a melt down or the greatest buying opportunity ever. I’m leaning more towards the former." 
Why did these Bear Stearns hedge fund managers go on to lose immense sums of money despite the fact that they expected the worst?

Or take the case of Michael Steinberg. He is fabulously rich, good looking and happily married. He was arrested last month for insider trading. What was he thinking? Over the past 3 years, Preet Bharara, the federal prosecutor in Manhattan, has claimed 71 insider trading convictions. Did Steinberg think he was never going to get caught? Was it not inevitable? 

What about Richard Fuld? The Lehman Brothers chief executive overplayed his hand and refused offers until the very end, either out of stubbornness or ego. Who can forget his pretentiousness: “As long as I am alive this firm will never be sold. And if it is sold after I die, I will reach back from the grave and prevent it.”The theatrical lyrics continued when Alistair Darling, British MP and then Chancellor of the Exchequer, apparently toldthe Americans that “we are not going to import your cancer”. He vetoedthe deal for Barclays to buy out Lehman Brothers, which worked out well since Barclays picked it up later for “next to nothing”. That obviously ticked off former US Treasury Secretary Henry Paulson who accusedDarling of "grin-f***ing" America over the bankruptcy of Lehman Brothers (I did not know such an expletive existed!).

Anyway, back to the subject at hand. 

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A few years ago, two neuroscientists undertook an experiment on the trading floor of a major investment bank in London. Over eight consecutive business days, at 11am and 4pm, samples of saliva were taken from the mouths of 17 traders. The results revealed that the traders performed much better on days in which they registered higher morning levels of the testosterone. The researchers also found that on days when traders beat their previous monthly average, their testosterone levels would go through the roof. 
In other words, better traders produced more testosterone and testosterone made them better traders. 

That’s what interesting about testosterone; it not only influences the environment but can be influenced by it too. It tends to go up in certain instances, such as when looking at the Sports Illustrated swimsuit issue. Or, when participating in a highly competitive environment such as a tennis or football match, or the trading floor of a large firm. Levels rise in preparation for the competition and then go up in winners and down in losers. In one experiment, 5 men were confined on a sail boat for 14 days. Towards the end of the trip, the higher ranking men (a social hierarchy was formed with 15 days on a sail boat in the middle of the ocean!!) had higher testosterone levels than the rest. 

In an absolutely bizarre case in 2007, Andrew Tong, a junior trader at SAC Capital, sued a trader Ping Jiang. The sexual harassment suit claimed that Jiang told Tong to take female hormones to prevent him from being too aggressive on the trading floor. Tong stated the repercussions of taking the supplements as causing him emotional distress, wanting to wear women's clothes and unable to perform sexually. As far as I remember, Tong lost the case and Jiang was sacked. But Jiang must have been an ardent believer in the too-much-of-testosterone theory. 

John Coates, initially a trader at Goldman Sachs and Deutsche Bank, now a neuroscientist, is convinced that physiology plays a driving role in markets. After all, market participants are biological organisms with neural and physiological apparatus. 

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He remarked that during the dot-com bubble, the markets were running on something deeper than dispassionate reason. The traders, normally "sober and prudent" were becoming "euphoric and delusional" and "overconfident in their risk taking, placing bets of ever-increasing size and ever worsening risk-reward trade-offs". Incidentally, he went on to state that traders were not upset with his observation. "Every trader knows when you're on a winning streak you act like a d*** and then you end up giving back all the money you made on the way up. I got a lot of emails from traders saying it was good to know where this odd behaviour comes from."

Last year, physicist Mark Buchanan, wrote an interesting piece in Bloomberg. He spoke about the "winner effect" which is a testosterone-driven dynamic. If 2 male lions fight over a potential mate, the level of testosterone in the winner skyrockets. By boosting confidence and risk appetite, the testosterone priming makes that winner more likely to win again until successive winning backfires. The animal becomes so aggressive and overconfident that it takes stupid risks - eg: standing in open ground where it can be seen and attacked by several rivals together. 

According to Buchanan, "a good part of the giddy energy and aggressive excitement that spills over during a long bull run must reflect a surge in general testosterone levels. The more the market rises, the more confident and risk-seeking traders and investors become. The ultimate outcome is a market of people largely convinced of their own invincibility and read to take irrational risks." 

To reinforce what was said above, better traders produced more testosterone and testosterone made them better traders. But what makes a better trader for a day or week can in the long term lead to disastrous mistakes. 

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So basically, testosterone turns the traders and investors into a herd of overheated animals and there is nothing anyone can do - except live with the market volatility and perhaps hire more women for the job. 

If only it was Lehman Brothers & Sisters, the world might have been a different place!
Meanwhile, I second Buchanan: It's time to launch a testosterone index.