Those who are familiar with, or have at least heard about, the extreme high-pressure trading room environment at investment banks and hedge funds know for a fact that the most successful traders are likely to be aggressive, dominating men – who social anthropologists often call ‘alpha males’. It takes a special mental makeup to soak all that pressure and take split-second decisions involving sums that sometimes exceed the GDP of many small countries, while appearing calm and poised. The energy levels required for that job is way beyond those of us who will struggle to get one hair-raising moment a year in their working lives.

Now, researchers at Cambridge University have come out with a scientific explanation for the predominance of alpha males among successful traders. They have linked trading success to the testosterone levels in the trader’s body. Testosterone is a steroid hormone, naturally produced in our bodies, which helps us to manage or perform better in competitive situations. It also has a major role in male sexual behaviour, which is natural as the urge to mate often brings out the most competitive behaviour among animals.

The researchers studied the daily testosterone levels in a group of male traders in London and the profits or losses they generated. They found that profits were higher on days when the trader’s testosterone levels were higher than the monthly average. The Cambridge researchers postulate that the increased hormone levels impart higher confidence levels and appetite for risk.

Through empirical evidence, most of us know that success begets more success. There is a ‘testosterone explanation’ for that too. Every success leads to even higher levels of the hormone and the heightened confidence levels and steely nerves hold for longer periods, leading to a string of successful trades. The researchers say this explains trader behaviour during market bubbles, the high confidence levels urging them to bid up prices higher and higher.

We also know that too much of a good thing can be dangerous. That is true in the case of testosterone-driven traders also. Beyond a point, the high hormone levels induce reckless risk taking and irrational decision making. Those who thought they can become successful hedge fund traders by taking daily doses of testosterone, be warned; it may backfire. This may also explain why the long-term performances of some highly successful traders are often patchy.

The researchers also found that humans are naturally equipped to handle financial volatility too. When the markets are highly volatile, they found that the level of another hormone called cortisol increases in the traders’ bodies. Cortisol has the opposite effect of testosterone, it suppresses risk-taking tendencies. That also explains market crashes when higher levels of cortisol make the traders overcautious and hesitant to enter the market even at lower levels.