Sunday, November 16, 2008

That explains it all!

"Ah!" Walhydra exclaims, throwing down her Sunday New York Times in her favorite Tenbucks. "That explains it all!"

She has just started to read an article in the November 16th Week in Review section by Judith H. Dobrzynski titled "Maybe the Meltdown's a Guy Thing." She almost feels as if she needs to read no further. The gist of the article is so obvious from the title and the image.

Gung Ho: Making bids at the Chicago Board of Trade the morning of Oct 24. Scott Olson/Getty Images
Dobrzynski introduces her article with a quick recitation of the ineffectual efforts of the Feds to get the market back in balance, and then points out that the main reason nothing seems to work may be male hormones.

If a research paper published earlier this year is correct, traders have become prisoners of their endocrine systems — testosterone, the elixir of male aggressiveness, during a bull market; cortisol, a steroid that helps the body deal with stress, when the bears take over.

The study suggests that raging hormones might explain why the men who rule the global markets send them rocketing up when they’re on a roll, and swooping down when they get scared, exhibiting judgment that can remind you of the guys in an Adam Sandler movie.

One investment strategist intuitively grasped the situation when he recently told The New York Times: “Normally markets are driven by fear and greed. Now it’s fear and fear.” In other words, instead of a rhythm of testosterone alternating with cortisol, it’s been cortisol and more cortisol for weeks.
"Well, DUH...." spouts Walhydra. "Any girl could tell that!"
John M. Coates, a former trader who is now a senior research fellow in neuroscience and finance at the University of Cambridge, and a colleague, Joseph Herbert, laid it all out in the study, published in the Proceedings of the National Academy of Sciences. Measuring steroid levels of traders in the City of London, they demonstrated that successful traders were heavily influenced during market booms by a positive feedback loop fueled by increased levels of testosterone.

It’s akin, Dr. Coates says, to the “winner’s effect” among male athletes, in which successive victories push testosterone levels higher and higher, giving the winner an advantage — until he begins to misjudge risk and take stupid chances. “Testosterone doesn’t create bubbles, but it exaggerates them,” Dr. Coates said. “It’s possible that bubbles are a male phenomenon.”

Likewise, when markets tumble, traders are stressed out by the uncertainty and volatility and produce a lot of cortisol; they fall into a negative feedback loop that turns them into emotional fear-mongers, rather than analytical thinkers. So they’re now prolonging and deepening the market plunge, and dragging down the economy.

With markets swinging scarily from one day to the next — up 800, down 350, down 400, up 250 and so on — traders have become bundles of dueling hormones.

Though Dr. Coates hasn’t studied it — yet — he said “it’s possible” that testosterone-fueled competitiveness may even have driven investment bankers to be ever more creative in inventing the risky, complex securities designed to deliver more leverage and better returns. They got so creative that few people understood their risks.
"Testosterone doesn’t create bubbles, but it exaggerates them. It’s possible that bubbles are a male phenomenon."

"Case closed," says Walhydra.

Whoa, said Jonathan D. Cohen, director of the neuroscience program at Princeton. “This is intriguing, but correlation is not causation,” he said. “That’s the first thing we learn in science.”
"Spoil sport!"
[But the question reminded Dr. Coates] of a headline in The Financial Times: “Icelandic Women to Clean Up Male Mess.” The article reported that Iceland had turned to two women to lead banks nationalized during the country’s brush with bankruptcy.

Women, Dr. Coates explained, have only about 10 percent of the testosterone men have; their judgment is not bollixed by it. He said he also suspected that women were less likely to produce excess cortisol. So he advised getting “more women and older men on trading floors.”
"There you go."
“This explains why bubbles and crashes are beyond the control of central banks,” Dr. Coates said, and they should recognize that male traders simply don’t respond rationally to their pricing signals.

And maybe they should add more women to the mix, too.
"You're damn right! And about time, too. Who's been feeding the kids on handouts from hubby all these centuries? Might do us all some good!"

And so it is.

Bless├Ęd Be.

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