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Behavioral economist and Nobel Prize winner Daniel Kahneman argues that people do not think with their brains, but with their entire bodies.
He means that our decisions are influenced by a variety of factors, including purely physiological ones. An example would be a lack of sleep, hunger, or hormonal changes.
It wasn’t until the early 2000s that scientists began to research the connection between hormones and financial decisions. Several dozen studies were conducted during this time. These are their findings.
FINDING № 1
A high level of testosterone and cortisol can encourage risk-taking
The most interesting hormones for researchers were testosterone and cortisol.
The first is the main male sex hormone, but it is also produced by the female body. The function of the reproductive system and the development of bone and muscle are influenced by testosterone.
Moreover, it has been shown to influence behavior in many studies. In men, it increases aggression toward strangers and cooperation within their group. Studies have also shown that men with higher testosterone levels are more confident, which may affect their decisions.
Cortisol is called the “stress hormone” – it’s an alarm signal. He enables the body to respond to threats by mobilizing. Stress narrows a person’s thinking: he focuses on finding a quick solution to a problem, but ignores important details in the process.
Usually, scientists study each hormone separately; however, in reality, testosterone and cortisol work in collaboration and affect, among other things, financial behavior. As an example, they can encourage financial risk-taking.
A pair of experiments at Imperial College London confirmed this hypothesis. In the first one, 142 people participated. Groups of an average of 10 people were divided into groups to explain the rules of the stock trading simulation game. Trading provides both a competitive environment and a high level of stress, which is ideal for such an experiment. The researchers tested the cortisol levels of the participants several times using saliva samples. The results revealed that men with higher levels of cortisol were more likely to take risks. The same relationship was not found among women.
75 people participated in the second experiment, which also simulated trading. Three groups received testosterone, cortisol, or placebos. In a study of only men, the authors also found an association between higher levels of both hormones and financial risk – but for a different reason. “Cortisol” group participants were more likely to invest in risky assets, while “testosterone” group respondents were more optimistic about the future price change of assets. It results in bold, but not always adequate behavior on the stock market. However, over-optimism can sometimes prove helpful.
In The Hour Between Dog and Wolf, neuroscientist and former successful Wall Street trader John Coates describes his own experiments measuring testosterone levels in male traders before and after trading. There was a direct correlation between profit margin and hormone levels. The self-confident trader made more risky trades, and, in some cases, the profits compensated for the mistakes. It is rare for high testosterone traders to actually analyze their decisions before acting.
According to Coates, this behavior makes the market even more chaotic. In order to balance the market, more women and older people should participate.
FINDING № 2
A rise in caution may be associated with estradiol
What would you choose: $100 now or $200 in two weeks? Even if it seems rational to wait and get a larger payout later, many people will prefer an immediate guaranteed payout. People often choose momentary pleasure over choosing a prosperous future because of the “present bias.”
Impulsive behavior, including financial ones, is a result of this cognitive bias. Hormones can, however, reduce effects of it, according to studies.
The University of North Carolina measured estradiol levels in 87 women aged 18 to 40 at different stages of their menstrual cycle. Increasing levels of the sex hormone estradiol reduces the likelihood of impulsive behavior. The experiment authors asked participants to decide: $70 now or $100 in a week. Women with low hormone levels preferred the first option more often.
Hormone levels are low during menstruation and higher afterward and until the middle of the cycle. However, this was not the case for all participants. “Bias to the present” was less prevalent among women with significant increases in estradiol.
There is a hypothesis that the increase in the hormone provides an evolutionary advantage–increased caution during peak fertile periods. Some scientists disagree with this explanation and call the effect of the hormone a coincidence.
FINDING № 3
Ghrelin can make people impulsive
You’ve probably heard that you shouldn’t go shopping on an empty stomach. Research is now confirming that it really helps to prevent unnecessary purchases.
A person’s stomach releases ghrelin, the “hunger hormone”, when they are hungry. Food signals are sent from the stomach to the hypothalamus, which then sends signals throughout the body. But ghrelin doesn’t stop there, and it appears to be able to affect impulsive behavior as well.
In a study conducted by scientists at Harvard Medical School, increased levels of this hormone also make people choose instant benefits even if they are promised more money later on.
Study participants were females aged 10-22: 64 were underweight due to eating disorders, 34 were normal weight. Ghrelin levels were measured before and after meals, and the participants chose between a small amount now and a larger amount of money later.
When their ghrelin levels were elevated, healthy control women were more likely to choose a small amount, but immediately. Nonetheless, no correlation was observed in anorexia nervosa participants – scientists believe it was a result of acquired resistance to ghrelin.
The study still requires further confirmation. Some conclusions can be drawn from observing yourself and not waiting for the results of large studies. Analyze what state you were in when you made an unnecessary purchase. In the future, be mindful of your ghrelin levels if you are hungry.
FINDING № 4
An increase in oxytocin can lead to generosity
It has been described as the hormone of love, affection, and trust, and even, according to Paul Zack, the molecule of virtue. During sex, hugs and kisses, or simply pleasant communication with close people, it is released.
Oxytocin is believed to boost life satisfaction and reduce anxiety. According to several studies, it is also associated with generosity.
Paul Zak gave participants $10 and asked them to share some of it with strangers in one of his experiments. Thus, recipients’ oxytocin levels and desire to share the donated amount increased.
In the next experiment, oxytocin or a placebo injection was researched. When hormone levels increased, people donated 56% more to various charitable causes. In addition, more recent studies have found that older people produce more oxytocin, which correlates with an increased desire to help others.
In Zach’s view, these findings require further testing – scientists know too little about the mechanisms of action of this hormone so far. He believes oxytocin is essential for public well-being – this will make the world kinder. The scientist recommends eight hugs a day to achieve this.
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