Here's an interesting study that finds the opposite what I would have expected – stress lowers risk taking. However, I'm not convinced that this study is really measuring what it claims to be measuring. And I'm not convinced that the experimental conditions adequately parallel the real-life conditions. So my conclusions are on hold. ~ Ilene
Stress Lowers Traders Risk Appetite
Former Goldman Sachs trader turned neuroscientist found stress could make traders more cautious, exacerbating crises
Posted at Business Insider, original article at the Daily Telegraph.
Financial markets may be more vulnerable to traders' stress levels than previously thought, according to a scientific study which found that high levels of the stress hormone cortisol can induce risk aversion.
The findings, which turns on its head the assumption that traders appetite for risk-taking remains constant throughout market up and downs, suggests stress could in fact make them more cautious, exacerbating financial crises just at a time when risk-taking is needed to support crashing markets.
In a study of City of London traders and the effect of cortisol on behaviour, researchers led by Dr John Coates – a former Goldman Sachs and Deutsche Bank derivatives trader turned neuroscientist – said this tendency towards caution could be an "under-appreciated" cause of market instability.
Mr Coates also said the finding could alter our understanding of risk – since up until now, financial and economic models have largely rested on the assumption that traders' personal risk preferences are consistent throughout the market cycle.
"Any trader knows that their body is taken on a roller coaster ride by the markets. What we haven't known until this study was that these physiological changes – the sub-clinical levels of stress of which we are only dimly aware – are actually altering our ability to take risks," said Mr Coates, now a researcher in neuroscience and finance at Cambridge University.
"It's frightening to realise that no one in the financial world – not the traders, not the risk managers, not the central bankers – knows that these subterranean shifts in risk appetite are taking place."
Keep reading Stress Lowers Traders Risk Appetite – Business Insider.
