- Coates and Herbert sampled hormones from male traders on a London trading floor under real working conditions: a trader's cortisol rose with both the variance of his trading results and the volatility of the market.
- In a follow-up experiment, Kandasamy and colleagues raised cortisol in volunteers for eight days at levels matching those seen in real traders: participants became more risk-averse.
- The authors note that these shifts may affect "a trader's ability to engage in rational choice" if elevated levels persist, so risk preferences are not a fixed trait.
- If your state changes your risk appetite, decisions should be made in a calm state and executed by rule: a size cap, a loss limit and a break are set before volatility starts.
Stress is part of trading. Prices move, money is at stake, and decisions need to be made while the screen is changing. The question traders rarely ask is whether stress changes how much risk you are willing to take. Two studies, one on a real trading floor, give an answer worth knowing.
A study on a London trading floor
Coates and Herbert did something unusual: they “sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London”. They report two results. First, “a trader’s morning testosterone level predicts his day’s profitability”. Second, and more relevant here: “a trader’s cortisol rises with both the variance of his trading results and the volatility of the market.”1
Cortisol is a stress hormone. So the more your results swing and the more the market swings, the higher it goes. The authors raise a further possibility: “if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader’s ability to engage in rational choice.”1 That is a hypothesis in their paper, not a result of that study; the next one tests part of it.
An experiment: what happens when cortisol stays high
Kandasamy and colleagues examined “the effects of chronic stress on financial risk taking by raising cortisol levels in volunteers over an 8-d period using individually tailored hydrocortisone regimens”. They found that “they become more risk-averse and that the overweighting of small probabilities becomes more exaggerated among men relative to women”. The protocol was designed so that “the increase in cortisol among participants replicated levels we had previously observed in real traders when faced with uncertainty and market volatility”.2
In plain words: in the experiment, a sustained stress-hormone level made people more cautious and made them overestimate small chances. The authors suggest that physiology-induced shifts in risk preferences “may thus be a cause of market instability that has been hitherto overlooked”.2
What these studies do not say
- They do not show that stress makes you lose money. They show that stress hormones track volatility and can shift risk preferences.
- The first study is an observation of male traders in one London firm; the second is an experiment on volunteers over eight days, not a study of traders deciding in real time.
- Neither is about crypto. Crypto trades around the clock with high volatility, which makes the question more, not less, relevant, but we have no data for it.
What this means for how you trade
Our practical reading, not a finding of the studies:
- Risk appetite is not constant. After a volatile week you may want less risk, or, after a losing run, more. Either way the feeling is a poor guide to the size.
- Decide in a calm state. Write your size, stop, daily loss limit and the maximum number of trades when markets are quiet.
- Tie size to volatility, not to mood. If the market is twice as volatile, a fixed-size position is twice as risky. Adjust the size by rule.
- Build breaks into the plan. A pause after a stop-out is not a luxury; see revenge trading.
- Notice a pattern of avoidance. If after losses you start skipping valid setups, that is the other direction of the same shift.
- Track your state. A short daily check-in shows how many trades were by the plan after stressful days compared with calm ones.
Free tools: fear of the next trade after losses and losing streak: is this still normal? cover the moments after a run of stops, and the daily check-in records your state and the discipline of each day. All data stays in your browser.
If trading stress affects your sleep or health, speak to a professional. This article is educational material, not investment or medical advice.
Questions traders ask
Does stress make traders lose money? The studies show that cortisol tracks volatility and can shift risk preferences. They do not measure profit from stress itself.
How do I trade with less stress? Reduce what has to be decided in the moment: fixed size, set loss limit, set stop and set breaks. See position sizing for how size relates to risk.
Is this specific to men? One result is: in the experiment, the overweighting of small probabilities “becomes more exaggerated among men relative to women”. The cortisol rise with volatility was observed in a group of male traders.
More in the Trading psychology category.
Footnotes
-
Coates, J. M., Herbert, J. “Endogenous steroids and financial risk taking on a London trading floor”, PNAS 105(16), 2008. Quotations are from the abstract. ↩ ↩2
-
Kandasamy, N., Hardy, B., Page, L., Schaffner, M., Graggaber, J., Powlson, A. S., Fletcher, P. C., Gurnell, M., Coates, J. “Cortisol shifts financial risk preferences”, PNAS 111(9), 2014. Quotations are from the Significance statement. ↩ ↩2
Sources
- Endogenous steroids and financial risk taking on a London trading floor. J. M. Coates, J. Herbert. Proceedings of the National Academy of Sciences 105(16), 6167–6172, 2008
- Cortisol shifts financial risk preferences. Narayanan Kandasamy and colleagues. Proceedings of the National Academy of Sciences 111(9), 3608–3613, 2014
This article is research, not investment advice. Results on history do not guarantee future results.