The next time the stock market crashes, you might want to blame high testosterone levels. New research shows there’s a connection between stock market bubbles and higher testosterone levels among traders.
Increased levels of testosterone can create stock market bubbles. The chain reaction that causes a bubble is straightforward: when a trader makes a successful investment, it increases testosterone levels. Higher testosterone levels push traders to take risks. When traders take more risks, it inflates the stock market past its real value, leading to a bubble.
Researchers are calling the process “psychological momentum”, and it’s found only in men. It’s a psychological condition that makes people feel things are going unstoppably their way.
“Like the soap bubbles a child likes to blow, investing bubbles often appear as though they will rise forever, but since they are not formed from anything substantial, they eventually pop”, explains Andrew Beattie from Investopedia.
“And when they do, the money that was invested into them dissipates into the wind.”
How the Study Worked
This latest study was performed by researchers at Ben-Gurion University of the Negev (BGU). Researchers found that psychological momentum “creates a state-of-mind where people feel things are going unstoppably their way”. The effect is induced by increased levels of testosterone.
There were actually two parts to the study. The first part of the study was designed to estimate the causal effect of psychological momentum on performance in real tournament settings. Then, researchers wanted to examine whether there were any gender differences in the corresponding response.
For the study, researchers looked at samples from men’s and women’s judo participants over the course of five years between 2009 and 2013. In the first sample, the team looked at the bronze medal fights for each tournament. Competitors in the bronze medal fight had won the same number of bouts, but some had won their most recent bout – while others did not. Researchers observed that those who reached the bronze medal fight following a win have a potential momentum advantage.
Next, researchers looked at the breakdown between 225 men’s fights and 231 women’s fights. Researchers found that the psychological momentum effect only exists in men – not in women.
Although researchers were looking at judo, they believe the effects can also be seen in the modern business world. Researchers explain that 90% of those in the financial market are men, which leads to an increased prominence of this effect”. They believe competitive activities – like stock market trading – are similar to physically competitive activities like judo.
Increasing the Number of Women in Financial Markets Can Reduce Market Bubbles
Researchers concluded their study by stating,
“By increasing the number of women 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”.
Ultimately, many industries continue to be male-dominated to this day. Few male-dominated industries, however, can have such a profound effect on the world economy like stock market trading.