Cortisol shifts financial risk preferences
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Description
- Freely available online through the PNAS open access option. 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 eight days 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 under-appreciated cause of market instability.
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| ID Code: | 68028 |
|---|---|
| Item Type: | Contribution to Journal (Journal Article) |
| Refereed: | Yes |
| Measurements or Duration: | 6 pages |
| Keywords: | Cortisol, Financial markets, Risk preferences, Risk taking, Stress |
| DOI: | 10.1073/pnas.1317908111 |
| ISSN: | 1091-6490 |
| Pure ID: | 32675150 |
| Divisions: | Past > QUT Faculties & Divisions > QUT Business School Current > Schools > School of Economics & Finance |
| Copyright Owner: | Consult author(s) regarding copyright matters |
| Copyright Statement: | This work is covered by copyright. Unless the document is being made available under a Creative Commons Licence, you must assume that re-use is limited to personal use and that permission from the copyright owner must be obtained for all other uses. If the document is available under a Creative Commons License (or other specified license) then refer to the Licence for details of permitted re-use. It is a condition of access that users recognise and abide by the legal requirements associated with these rights. If you believe that this work infringes copyright please provide details by email to qut.copyright@qut.edu.au |
| Deposited On: | 03 Mar 2014 23:06 |
| Last Modified: | 10 Jul 2024 09:56 |
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Cortisol shifts financial risk preferences. (deposited 13 Jan 2014 00:18)
- Cortisol shifts financial risk preferences. (deposited 03 Mar 2014 23:06) [Currently Displayed]
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