Success breeds success, right?
Not always. Among traders, success can lead to price bubbles, instability and collapse.
Scientists are now pointing the finger at “psychological momentum” – that feeling when you’ve just scored big and figure that you can do no wrong.
And guess what? Men are especially prone to that special breed of reckless euphoria. Testosterone prompts an urge to take exaggerated risks on deals and, as a consequence, prices rise without real-world foundation.
Research on judo matches
New research conducted at Ben-Gurion University of the Negev (BGU) concludes psychological momentum significantly affects performance among men but not women.
The team’s findings were published in the Journal of Economic Behaviour & Organisation after studying men and women in judo competitions.
“Such an effect may lead male traders, driven by an increase in testosterone due to a successful investment, to take exaggerated risks, which, in turn, create price bubbles,” says Dr Ze'ev Shtudiner from the Department of Economics and Business Administration, Ariel University, Israel, reported in the Science Daily .
This follows on from research from the University of Leicester last year which found men on average earned less than their female counterparts but, when they took exaggerated risks and won, they won big, making them likely to be the best performer overall.
UoL’s Dr Daniel Ladley said at the time: “It is important to note that the better performing male traders in these experiments were not more skilled, but made larger profits through riding their luck.”
So the FCA might want to think about a new regulation to control price fluctuations…