title: Cortisol shifts financial risk preferences.
abstract: Risk taking is central to human activity. Consequently, it lies at the focal point of behavioral sciences such as neuroscience, economics, and finance. Many influential models from these sciences assume that financial risk preferences form a stable trait. Is this assumption justified and, if not, what causes the appetite for risk to fluctuate? We have previously found that traders experience a sustained increase in the stress hormone cortisol when the amount of uncertainty, in the form of market volatility, increases. Here we ask whether these elevated cortisol levels shift risk preferences. Using a double-blind, placebo-controlled, cross-over protocol we raised cortisol levels in volunteers over 8 d to the same extent previously observed in traders. We then tested for the utility and probability weighting functions underlying their risk taking and found that participants became more risk-averse. We also observed that the weighting of probabilities became more distorted among men relative to women. These results suggest that risk preferences are highly dynamic. Specifically, the stress response calibrates risk taking to our circumstances, reducing it in times of prolonged uncertainty, such as a financial crisis. Physiology-induced shifts in risk preferences may thus be an underappreciated cause of market instability.
authors.affiliation: Institute of Metabolic Science, University of Cambridge and National Institute for Health Research Cambridge Biomedical Research Centre, Addenbrooke's Hospital, Cambridge CB2 0QQ, United Kingdom.
authors.forename: Narayanan
authors.initials: N
authors.lastname: Kandasamy
authors.forename: Ben
authors.initials: B
authors.lastname: Hardy
authors.forename: Lionel
authors.initials: L
authors.lastname: Page
authors.forename: Markus
authors.initials: M
authors.lastname: Schaffner
authors.forename: Johann
authors.initials: J
authors.lastname: Graggaber
authors.forename: Andrew S
authors.initials: AS
authors.lastname: Powlson
authors.forename: Paul C
authors.initials: PC
authors.lastname: Fletcher
authors.forename: Mark
authors.initials: M
authors.lastname: Gurnell
authors.forename: John
authors.initials: J
authors.lastname: Coates
mesh_terms: D000328:Adult; D018592:Cross-Over Studies; D005260:Female; D005376:Financial Management; D006801:Humans; D006854:Hydrocortisone / Q000008:administration & dosage / Q000097:blood* / Q000378:metabolism / Q000494:pharmacology*; D008297:Male; D012309:Risk-Taking; D012463:Saliva / Q000378:metabolism; D012737:Sex Factors; D013312:Stress, Physiological / Q000502:physiology*
chemical_list: D006854:Hydrocortisone