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Stress hormone effect on bankers can worsen crises

Financial crises can be made worse by the hormones of stressed bankers, a study suggests.

High levels of the stress hormone cortisol are likely to make traders risk-averse when the going gets tough, say researchers.

This is often just the time when the economy needs them to keep their nerve and start buying instead of selling or sitting put, it is claimed.

The new findings build on earlier research that showed a 68% hike in cortisol levels among City of London traders as market volatility increased over a period of two weeks.

In the latest study, involving volunteers playing a financial risk-taking game, a strong link was seen between higher cortisol and a drop in willingness to take risks.

Dr John Coates, a member of the Cambridge University research team and a former Wall Street derivatives trader, said: "Any trader knows that their body is taken on roller-coaster ride by the markets. What we haven't known until this study was that these physiological changes - the sub-clinical levels of stress of which we are only dimly aware - are actually altering our ability to take risk.

"It is frightening to realise that no one in the financial world - not the traders, not the risk managers, not the central bankers - knows that these subterranean shifts in risk appetite are taking place."

Cortisol, secreted by the adrenal glands, fuels the "fight or flight" response that evolved to aid survival in the face of physical threats, such as predators.

But cortisol levels also rise powerfully in non-physical stress situations including times of uncertainty.

Chronic high cortisol is linked to a host of health problems, including weakened immune function, reduced bone density, weight gain, raised blood pressure, heart disease, anxiety and depression.

The new research suggests it is also strongly associated with risk aversion.

The scientists' findings appear in the journal Proceedings of the National Academy of Sciences.

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