Trading Too Much & Holding Losers? Might Be Hormonal.

New research has linked cortisol and testosterone to behavioral biases in investors.

Illustration by II

Illustration by II

Those persistent, costly errors that even sophisticated investors commit despite knowing better — such as holding losing positions too long — may be spurred by hormones.

A new paper on the physiological aspects of investing has tied testosterone and stress-induced cortisol to a common behavioral bias, called the disposition effect.

“We’re predisposed to hold onto our losers and sell our winners, while in many contexts we should be doing the opposite,” lead author John Nofsinger, a finance professor at the University of Alaska Anchorage, told Institutional Investor Wednesday in a phone interview. “Are there biological reasons that nudge us towards certain psychological biases? The answer I’ve found is absolutely yes.”

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Under his study, about 40 graduate students in finance were told they could increase their final grades by up to one third of a letter grade (e.g. A- to A) and win gift cards ($75 for first place, $50 for second, $25 for third) by outperforming classmates in a trading simulation.

“The exact nature of incentives is revealed just prior to data collection to maximize anticipatory arousal, stress, and the competitive nature of professional trading,” explained authors Nofsinger, Fernando Patterson (North Carolina Central University), and Corey Shank (Dalton State College) in their paper. The researchers collected students’ saliva before and after the contest to track hormone levels.


Both testosterone and cortisol are positively related to portfolio turnover, the study found, and cortisol is linked to the disposition effect, or cutting winners early while riding losers down.

“The results show that hormonal activity is an important underlying element of investment biases,” and these two hormones specifically relate to “irrational financial decisions,” the researchers concluded. “These results have significant implications for financial decisions and performance of all kinds of investors, from the retail investor to Wall Street professionals especially given the androgen-driven and stressful field of finance.”

And rarely is finance more stressful than right now. Investors are dealing with wildly fluctuating stock markets plus anxiety over their own family’s health — all while trading from home, many with kids underfoot. Cortisol is probably flowing like cabernet.

Investors may be hormonally primed to indulge biases, but they’re not doomed to.

“Under stress, we do tend to make more psychological errors,” Nofsinger said in the interview. “We do need to create processes for making decisions that allow for extra reflection on how this environment is affecting our body. Trying to focus on long-term goals is helpful. I know all of us are looking at the latest Covid numbers all the time, and the latest stock market numbers — that’s when the emotions come up.”