Quilted Science

Patchwork thoughts on psychology, neuroscience, and human behavior.

Androgen Steroids: A Prenatal Influence on Stock Market Success

Testosterone, trading and competition.

The physical demands faced by high-frequency stock market traders might not be quite the same as those faced by athletes, however there is a strong physical side to the job: For one, "noise" trading requires professional traders to engage in extended periods of concentrated alertness and intense visuomotor scanning. Additionally, traders must react quickly to rapidly changing market conditions and perform under a relatively high level of stress. So while high frequency trading may not be quite the same as competitive sports, it is reasonable to assume that just as there are certain physical attributes that promote athletic success, there may also be a significant biological component to stock market success. At least this is the hypothesis that Aldo Rustichini, John M. Coates, and Mark Gurnell put forward in a recent article published in the PNAS.


The study takes a close look at 49 male financial markets traders, and how their performance correlates with the length-ratio of their second and fourth digits (2D:4D). Although this might sound a little strange to the average social scientist, it needs to be pointed out that the length of your second digit, the index finger, relative to your fourth digit, the ring finger, is often used in biological studies as reliable indicator of prenatal androgen steroid exposure. Studies show that higher levels of this exposure leads to a longer fourth digit in relation to the second digit in men, and this digit ratio has successfully been linked to performance in competitive sports, such as soccer, rugby, basketball, and skiing. Moreover, increased confidence and search persistence, preferences for risky behavior, as well as heightened vigilance, reduce distraction by irrelevant stimuli, stabilized visual attention, and improved visuomotor skills have all been identified as consequences of enhanced androgenic activity.
As the authors point out

"successful trading in the financial markets requires more than correct beliefs about the value of securities. Traders must also possess confidence enough to place their bets, risk preferences high enough to place bets of meaningful size, and the ability to process information quickly enough to keep one step ahead of competitors."

In addition to the physical demands mentioned at the outset, this suggests that 2D:4D might actually be a very useful predictor of stock market success; which indeed it turns out to be:
Using the traders profit and loss (P&L) information, risk limits and income for a 20 month time period, the study finds that

"the lower a trader's 2D:4D ratio, the greater his P&L [...] a trader in the lowest tertile of the 2D:4D range makes 11 times the P&L of a trader in the highest tertile"

 

One reason for the stark effect of the 2D:4D ratio on trader profitability may be explained by a heightened sensitivity to testosterone levels, which is a biological consequence of prenatal steroid exposure. This explanation is supported by the additional finding that high morning testosterone levels significantly increase profits and losses for a given day.

"This result suggests that prenatal androgen exposure may affect a trader by sensitizing his subsequent trading performance to changes in circulating testosterone."

Traders with lower 2D:4D ratios are also shown to be more successful as stock markets become more volatile; possibly as a result of the increased premium on vigilance and risk taking in the more volatile setting. This latter finding opens up the possibility that the study results may not hold in the same way for traders involved in long-term analytical trading, such as investment bankers.
As an interesting side note on this possibility, the study mentions that

"For example, arbitrage traders at the investment banks and hedge funds are increasingly hired from the math and science departments of universities, and one study, which looked at average digit ratios in university departments found that faculty from math, science, and engineering exhibited higher, more feminine digit ratios"

In conclusion, the study finds

"a roughly even split between the contributions of biology and experience; biology in this case being the organizing effects of prenatal androgens on an individual's body, brain, and behavior."

If at any point then you find yourself interviewing for a position with a stock trading company don't be surprised if your future boss is just as interested in your hands as in your CV.

 

Main Reference:
Coates, J., Gurnell, M., & Rustichini, A. (2009). Second-to-fourth digit ratio predicts success among high-frequency financial traders Proceedings of the National Academy of Sciences, 106 (2), 623-628 DOI: 10.1073/pnas.0810907106

Republished from: http://twenty2five.blogspot.com/

Daniel R. Hawes is a social psychologist stuck in an applied economist's body.

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