The Bull of Wall Street: experimental analysis of testosterone and asset trading

Working paper

Financial markets deviate from efficiency due to behavioral causes and there is growing evidence that biological factors affect individual financial decisions that could be reflected in markets. Many behavioral influences on asset prices have underlying biological mechanisms associated with fluctuations in the levels of the male sex hormone testosterone. Testosterone, a chemical messenger especially influential in male physiology, varies cyclically and in response to challenge, fluctuates according to victory and defeat, and is taken as a performance-enhancer among some financial professionals, yet no study has tested how it causally affects trading decisions. We exogenously elevated testosterone in traders in an experimental asset market and found that it causes significantly higher and longer-lasting asset overpricing compared to placebo. Using both aggregated and individual trading data we demonstrate that testosterone administration generates bubbles by causing persistently high bids and slow incorporation of asset fundamental value among traders.

Authors: Jiao, P; Nadler, A; Alexander, V; Johnson, C; Zak, P

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2016-10-13
• Paper number: 806
• Keywords: asset price bubbles; experiment; testosterone