Trading is not just about risk assessment and fundamental and technical analysis. There seems to a biological component that is gradually percolating into the mainstream. John Coates’, work that was reported in the Financial Times, and his 2012 book “The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust” were my first introductions to this space.  

I am not saying this is the best thing since sliced bread. I am not arguing that the findings are iron clad and all have been duplicated. I am suggesting the studies are provocative.

CNBC carried a report earlier this spring about a study of more than 3000 hedge fund managers conducted by the University of Central Florida and Singapore Management University. Using software measuring the ratio of the height and width of the face, which is an accepted proxy for testosterone level, and controlling for exogenous factors like risk and market environment, the study found that, well alpha was negative for alpha. 

Those managers with higher testosterone underperform those with low testosterone by 5.8% annually. They traded more frequently and shown a propensity to favor lottery-like stocks. The higher testosterone managers were also more susceptible to what is technically called the “disposition effect,” selling winners and holding on to losers. Interestingly, the research found that investors tend to prefer hedge fund managers that have the same level of testosterone as their own.  

Here a relative hormonal level boosts the chances of certain behaviors. It is not so surprising. However, what is also fascinating is if the causation arrow can be reversed. Then I stumbled on Jerry Useem’s article in last summer’s in the Atlantic, Power Causes Brain Damage.

Useem reminds us that this is not a new insight. He approvingly quotes Henry Adams that power is “a sort of tumor that ends up killing the victim’s sympathies.”What Useem does is to offer a snapshot of various studies that illustrate elements of Adams’ insight.