Stressed Bankers 'Make Financial Crises Worse'
The hormones of stressed bankers can make financial crises worse, it has been claimed.
High levels of the stress hormone cortisol are likely to make traders wary of taking risks when things get difficult, according to a study by researchers at Cambridge University.
Chronic stress may have reduced risk-taking just when it was needed the most, when markets were in free fall and needed traders and investors to buy distressed assets, the authors claim.
Cortisol is produced by the adrenal glands and fuels the 'fight or flight' response which evolved to help survival against physical threats, such as predators. Levels of the hormone also rise in non-physical stress situations, including times of uncertainty.
In the study, volunteers played a financial risk-taking game and a strong link was established between higher cortisol and a drop in willingness to take risks.
It comes after an earlier experiment discovered a 68% rise in cortisol levels among City of London traders as market volatility increased over a fortnight.
Dr John Coates, a member of the research team and a former Wall Street derivatives trader, said: "Any trader knows that their body is taken on 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 risk.
"It is 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."
Participants in the study, the findings of which appear in the journal Proceedings of the National Academy of Sciences, carried out lottery-style financial risk-taking tasks with cash rewards.
Over eight days the 20 men and 16 women aged 20 to 36 were given an artificial form of cortisol that raised their levels of the stress hormone by 69%, replicating the increase seen in traders.
At first, spikes in cortisol had little effect, but over time the willingness of the volunteers to take risks dropped sharply.
Researchers saw a fall of 44% of the "risk premium", the amount of extra risk a person will tolerate in the hope of getting higher returns.
There was no difference in risk averseness between the sexes, although men seemed to be fixated on smaller risks when exposed to chronically high cortisol levels, the study found.
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