Giving Irrational Exuberance the Finger(s)

In today’s Washington Post, there is an article called Born to be a Trader? Fingers Point to Yes. According to the article, one contributing factor to the meltdown of the economy is … testosterone

A new study has found that men who were programmed in the womb to be the most responsive to testosterone tend to be the most successful financial traders, providing powerful support for the influence of the hormone over their decision-making.

Apparently, Alan Greenspan was familiar with this phenomena

“Testosterone is the hormone of irrational exuberance,” said Aldo Rustichini, a professor of economics at the University of Minnesota who helped conduct the study, being published today in the Proceedings of the National Academy of Sciences. “The bubble preceding the current crash may have been due to euphoria related to high levels of testosterone, or high sensitivity to it.”

According to the abstract in the Proceedings of the National Academy of Sciences

Prenatal androgens have important organizing effects on brain development and future behavior. The second-to-fourth digit length ratio (2D:4D) has been proposed as a marker of these prenatal androgen effects, a relatively longer fourth finger indicating higher prenatal androgen exposure. 2D:4D has been shown to predict success in highly competitive sports. Yet, little is known about the effects of prenatal androgens on an economically influential class of competitive risk taking—trading in the financial world. Here, we report the findings of a study conducted in the City of London in which we sampled 2D:4D from a group of male traders engaged in what is variously called “noise” or “high-frequency” trading. We found that 2D:4D predicted the traders’ long-term profitability as well as the number of years they remained in the business. 2D:4D also predicted the sensitivity of their profitability to increases both in circulating testosterone and in market volatility. Our results suggest that prenatal androgens increase risk preferences and promote more rapid visuomotor scanning and physical reflexes. The success and longevity of traders exposed to high levels of prenatal androgens further suggests that financial markets may select for biological traits rather than rational expectations.

Prenatal androgen is another way of saying prenatal exposure to testosterone. A marker for this exposure is a relatively long ring finger of the right hand. In fact, the key measure is the 2D:4D, which is the ratio of the length of the second digit (index finger) to that of the 4th digit (ring finger). A low 2D:4D is a ring finger that is longer than the index finger and suggest greater exposure to testosterone in utero. A higher 2D:4D occurs when the ring and index fingers are about the same length, and this suggests lower exposure to testosterone.

According to the Post article

When the researchers looked at the traders’ profits over a 20-month period from 2004 to 2007, they found that the most experienced traders who had been exposed to the most testosterone in the womb earned about six times as much as those exposed the least. They also tended to have the longest careers, surviving about three years more on average.

And this

When the researchers looked at 14 of the traders in the original study, they found that those exposed to the most testosterone in the womb were the most likely to make more money on the days when the amount of the hormone in the blood was highest, indicating that their profitability was driven by their sensitivity to the hormone as well as the amount of it.

The researchers also found that those exposed to the most prenatal testosterone tended to make the most money on days when the market was most volatile and decisions had to be made especially quickly. That indicates that in addition to the hormone’s tendency to boost confidence and increase the appetite for risk, the sheer mental ability enhanced by early testosterone exposure is probably a key factor. Earlier research had found that those exposed to higher prenatal testosterone as indicated by 2D:4D measurements tended to be better athletes and musicians.

The article even goes so far as to say that the 2D:4D might be used as part of job screening for traders. Well, if it would work to screen traders, why wouldn’t it be good for, ahem, women to screen potential mates?

Numeracy or Literacy?

Numeracy or Literacy


Hold on a minute.

I just looked at my right hand and I would say that my 2D:4D is … gulp … slightly greater than 1. Oh, great!!!

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