Risk averse – sometimes

A fascinating article in the New York Times by a retired trader, now neuroscientist at Cambridge John Coates entitled “The Biology of Bubble and Crash.” In it, he notes that when someone enters a trade, the body feeds testosterone into the system of the trader, creating a sense of invincibility and generating a very high tolerance for risk. Bad news, however, feeds cortisol into the system generating an irrational level of risk aversion.Our models tend to assume that people have a relatively stable level of risk aversion. Investment houses give tests to be filled in at home after hours to determine one’s tolerance for risk. What Coates work has shown, is that risk tolerance fluctuates wildly and does so at the hands of our hormones. Younger males — the typical traders — are particularly susceptible to volatile body chemistry.