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Decision Making, Financial Risk Aversion and Behavioral Biases:
The Role of Testosterone and Stress
by
John R. Nofsinger
1
Fernando M. Patterson
2
Robert T. Daigler
3
January 4, 2015
Abstract
This study examines testosterone and cortisol levels of finance graduate students participating in
three investment trials. The trials involve a portfolio asset allocation task with the last trial also
including a series of rebalancing tasks in an increasingly competitive environment. Their
testosterone and cortisol levels are positively correlated with financial risk in a competitive
environment. However, testosterone is also positively related to more diversified portfolios.
Specifically, higher testosterone participants choose higher risk asset allocations to earn a higher
risk premium, but also chose more diversified portfolios to reduce unsystematic risk. Lastly, task
success leads to higher levels of post-trial testosterone.
Keywords: testosterone, cortisol, physiology, stress, risk aversion, disposition effect
1
John Nofsinger is the William H. Seward Chair in International Finance and Professor of
Finance at the University of Alaska Anchorage, john.nofsinger@uaa.alaska.edu.
2
Fernando Patterson is Assistant Professor of Finance at the University of Texas-Pan American,
pattersonfm@utpa.edu.
3
Robert Daigler is the Knight Ridder Research Professor of Finance at Florida International
University, daiglerr@fiu.edu.
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1. Introduction
To what extent does a person’s physiology impact his (her) financial decision making?
Finance professionals typically ignore this question. To help answer it, we examine how levels of
the sex hormone testosterone and the stress hormone cortisol affect financial decision making.
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The current body of research (summarized below) demonstrates that testosterone plays a key role
in decisions involving economic risk and reward. In particular, testosterone is thought to exert a
significant influence on the cognitive processes that deal with the interpretation of financial
information, risk preferences, and investor confidence (Coates et al., 2010). Therefore, testosterone
levels can have important repercussions for our financial decisions and the resulting investment
outcomes. Additionally, it is widely held that stress is rampant among finance professionals,
including traders and fund managers, and scholars have found a clear connection between stress
and cognitive processes. Yet the specific role of stress on financial choices and outcomes has only
recently been addressed, and then only by a limited number of studies.
The present study represents one of the first comprehensive efforts to understand the role
of both testosterone and stress on financial decision making. The nature of their roles is not well
understood. For example, it is not known whether testosterone or stress influence every kind of
financial decision (such as long-term investing versus day trading), or if their effects are limited
to a particular subset of financial decision-making tasks, like competitive bidding (Schipper,
2014). Moreover, although we do not know the specific nature of the relation between our
physiology (i.e., hormone actions), cognitive biases, and financial performance, we are confident
that cognitive biases lead to irrational choices that can affect financial performance. However,
financial success or failure could potentially impact the physiology of the investor, creating a
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Cortisol is secreted by the adrenal glands into the blood in response to stressful stimuli. Therefore, the circulating
level of cortisol (versus cortisol that is stored in the adrenal glands) is the primary biological marker of stress.
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feedback loop. Therefore, a link from the stock market back to investors might be a critical
component for feedback models of stock market bubbles, yet little research has been conducted on
this aspect of the decision-making process.
Most studies examine the relations between testosterone or stress and economic risk from
a static framework. That is, studies assume that the relations between either testosterone or stress
and economic risk are constant for different tasks. However, we know that some activities, such
as poker tournaments, can impact a person’s physiology, including hormone levels. Therefore,
physiology could play different roles in financial decisions, depending on the context of the
decision – for example, investing decisions versus speculative decisions such as trading. Therefore,
the relations between testosterone or stress and economic risk are likely to be dynamic ones, in
which the influence of testosterone and cortisol changes depending on the context of the risk-
taking activity, including whether it is goal oriented or completion oriented, and on the prior levels
of success.
In this study, we investigate the role of testosterone and cortisol on financial choices and
outcomes during two single decision points, portfolio formation (asset allocation) tasks and one
multipoint portfolio rebalancing task. These tasks involve financial decision making for long-term
investments using a financial trading simulation application. We find that higher levels of
testosterone and stress increase risk taking through the selection of higher risk asset allocations
that earn higher risk premiums. Alternatively, their asset allocations are also associated with more
diversified portfolios, which means lower unsystematic risk. Therefore, the positive association
between testosterone and risk in other contexts (such as social decisions) turns out to be more
nuanced for financial decisions. Consequently, financial risk decisions are not speculative risk
(because of increased diversification), but rather calculated to earn a higher expected return
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(through riskier asset allocations). We also find that higher testosterone levels are associated with
the selection of more risky portfolios than are necessary to meet the desired investment goals.
Subjects with higher testosterone levels attempt not only to achieve the financial goals required,
but also to perform well compared to their peers. Lastly, we find a relation between financial
performance and changes in testosterone: Subjects who performed better in the simulation
increased their level of testosterone relative to those who performed poorly. Therefore, we find
that testosterone level impacts participants’ financial decisions, and the outcome of those decisions
then impacts testosterone levels.
The remainder of this paper is organized as follows. Section 2 reviews the literature on the
influence of testosterone and cortisol on financial risk aversion. Section 3 describes our methods
and three trials. Specifically, we discuss our subjects, the trials, investment simulations, and saliva
testing. Section 4 reviews the results for the first asset allocation task. The results from the second
asset allocation task are shown in Section 5. The final trial, the rebalancing task, is reported in
Section 6. Our discussion of the results can be found in Section 7.
2. The Literature and a Discussion of Factors Affecting Decision Making
2.1. Testosterone and Financial Decision Making
Only a few studies have addressed the effect of testosterone on financial decision making,
leaving much to be explored. Three important issues that remain poorly understood are: 1) How
does testosterone affect financial outcomes (such as investment risk and expected return)? 2) Is
testosterone related to behavioral biases like trend following or loss aversion? 3) Are testosterone
levels impacted by financial trading and competition? The reminder of this section describes the
extent to which these questions are addressed in the literature to date.
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The literature on the relation of testosterone to financial decision making is concentrated
in a few recent studies. Coates and Herbert (2008) and Coates et al. (2009) find evidence for a
correlation of testosterone levels with financial decision making. Coates and Herbert measure
morning (11:00 a.m.) and afternoon (4:00 p.m.) testosterone levels in a small group (n=17) of male
traders for eight consecutive business days under real working conditions. The authors find that
traders achieve a significantly greater daily profitability (profit and loss level, or P&L) on days
when their morning testosterone level is above their overall median level over the course of the
study. These results show that morning testosterone levels can partially predict the direction of
daily profitability in traders. Similarly, Coates, et al. (2009) measure the length ratio of the second
digit finger to the fourth digit finger ratio (2D:4D) of 44 male high-frequency traders and find it to
be predictive of the traders’ P&L levels over a 20-month period. The 2D:4D ratio is directly related
to the amount of in utero testosterone exposure.
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Therefore, the results offer the possibility that
prenatal testosterone levels are associated with the long-term profitability of high-frequency
traders.
The Coates and Herbert (2008) and Coates et al. (2009) studies show evidence that
testosterone is related to financial profitability in trading activity, providing a partial answer to the
question of how testosterone affects financial outcomes. However, they do not find a relation
between testosterone and financial risk taking. This finding (or rather lack of) is curious, given the
empirical evidence linking testosterone to a variety of social behaviors involving risk, such as a
higher likelihood of committing a violent crime among male prison inmates (Dabbs et al., 1987),
drug use, aggressive violence and high-risk sexual behavior among anabolic steroid users
(Middleman and DuRant, 1996), and antisocial and deviant behavior among male U.S. Army
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An alternative physical measure used by Jia, Lent, and Zeng (2014) employs characteristics of a person’s face to
create a facial masculinity index in order to examine masculine behaviors in financial misreporting.