Are Market Bubbles Driven by Men Traders’ Testosterone Levels?

Israel's BGU suggests: Increasing number of women in financial markets may stabilize these markets since women have less dramatic shifts in testosterone.

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“Male traders, driven by an increase in testosterone due to a successful investment, to take exaggerated risks, which, in turn, create price bubbles,” claim a new study conducted at Ben-Gurion University of the Negev (BGU)

The researchers call it: Psychological momentum, and say it is significantly affects performance among men but not among women, which may account for exaggerated risk-taking in financial and business endeavors among males.

Psychological momentum is defined as a state-of-mind where an individual or a team feels things are going unstoppably their way and is known to be caused, among other factors, by shifts in testosterone levels.

The study, “Psychological Momentum and Gender,” is published in the March volume of the Journal of Economic Behavior & Organization.

According to Dr. Danny Cohen-Zada “The purpose of our study was twofold: to estimate the causal effect of psychological momentum on performance in real tournament settings, and to examine whether there are any gender differences in the corresponding response.”

The researchers analyzed two different samples of men’s and women’s judo competitions from 2009 to 2013.

In the first, they looked at the bronze medal fights of each tournament. While competitors in this fight won the same number of total bouts, some had won their most recent bout while others had not. Those who reached the bronze medal fight following a win have a potential momentum advantage.

The authors examined this unique setting to determine whether the contestants with the momentum advantage had a higher probability of winning the fight.

“Our results showed that based on a cross-section analysis of 106 men’s and 111 women’s fights from eight major annual judo events, having a psychological momentum advantage significantly increases the probability of winning in men’s contests but not in women’s,” says Dr. Alex Krumer of the Swiss Institute for Empirical Economic Research (SEW), University of St. Gallen, Switzerland.

In the second part of the study, based on the head-to-head history of the pairs from the first sample and analyzing 225 men’s and 231 women’s fights, the researchers obtained similar results by analyzing how the performance of the same pair of judokas (judo experts) are affected by varied momentum statuses in different tournaments. As expected, the results of these specifications indicate that the psychological momentum effect exists among men, but not among women.

The researchers believe that their findings have implications for business. “We can connect our findings to the effect of psychological momentum in financial markets where 90 percent of traders are men,” says Dr. Ze’ev Shtudiner from Ariel University, Israel. Drs. Krumer and Shtudiner earned their doctoral degrees in economics from BGU.

“Such an effect may lead male traders, driven by an increase in testosterone due to a successful investment, to take exaggerated risks, which, in turn, create price bubbles,” says Dr. Shtudiner. “By increasing the number of women traders in financial markets, it may be possible to stabilize these markets since women have less dramatic shifts in testosterone levels, which can make them less prone to the momentum effect. This argument is consistent with our results that momentum effects are generated only among men, since it is only among them that testosterone levels increase after success.”

According to Dr. Krumer, psychological momentum can be used positively, “An increased frequency of positive feedback from managers after successful actions may turn into a positive psychological momentum and thus increase productivity. Similarly, managers should exert efforts to reduce the influence of unsuccessful actions of their workers to avoid productivity losses.”

Given these findings, Dr. Cohen-Zada believes additional research focusing on the role of psychological effects on performance in male-dominated positions, such as stockbrokers, high-profile managers, politicians, and military commanders, would be beneficial.

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