Cortisol shifts financial risk preferences

Abstract

Risk taking is central to human activity. Consequently, it lies at the focal point of behavioral sciences such as neuroscience, economics, and finance. Many influential models from these sciences assume that financial risk preferences form a stable trait. Is this assumption justified and, if not, what causes the appetite for risk to fluctuate? We have previously found that traders experience a sustained increase in the stress hormone cortisol when the amount of uncertainty, in the form of market volatility, increases. Here we ask whether these elevated cortisol levels shift risk preferences. Using a double-blind, placebo-controlled, cross-over protocol we raised cortisol levels in volunteers over 8 d to the same extent previously observed in traders. We then tested for the utility and probability weighting functions underlying their risk taking and found that participants became more risk-averse. We also observed that the weighting of probabilities became more distorted among men relative to women. These results suggest that risk preferences are highly dynamic. Specifically, the stress response calibrates risk taking to our circumstances, reducing it in times of prolonged uncertainty, such as a financial crisis. Physiology-induced shifts in risk preferences may thus be an underappreciated cause of market instability.

Stress induced risk-aversion is reverted by D2/D3 agonist in the rat

“…Indeed, while acute stress can be considered adaptive (Diamond et al, 1992), chronic or prolonged stress becomes maladaptive, in line with its negative impact in several dimensions of brain function (Sousa and Almeida, 2012), and, as shown herein, also risk preference. In line with our data, Kandasamy et al (2014) recently described that chronic elevation of cortisol levels induced by administration of hydrocortisone promotes a risk aversive behavior among healthy volunteers.…”

National Survey of UK Consultant Surgeons’ Opinions on Surgeon-Specific Mortality Data in Cardiothoracic Surgery

“…20 Prolonged stress elevates cortisol levels that have been associated with anxiety, impaired learning, risk-averse behavior, and burnout. 21,22 Policy makers need to understand these complex processes to avoid unintended consequences when introducing quality improvement measures. 23 The majority of respondents to the survey were of the opinion that gaming of patient disease status and comorbidities occur during data collection.…”

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“…It is tempting to link them to diurnal variation in physiological factors. Cortisol, for example, a hormone related to stress, shifts preferences for financial risks [23] and follows circadian rhythms [24]. My results can be interpreted to suggest that investors learn to decouple 235 their trading decisions from these factors as they gain experience.…”