Stress hormone rise linked to less risky financial decisions

Chronically high levels of the stress hormone cortisol make people play it safe financially, a new study suggests. The result has implications for the financial system: When markets reel, people may be less inclined to make the risky investments needed to stop the freefall.

In earlier work, John Coates of the University of Cambridge and a colleague reported that London traders experienced a 68 percent boost in daily cortisol during an eight-day spell of market instability. In the new study, participants took cortisol pills over eight days to get a similar boost . The researchers then asked participants choose between two lotteries, one risky and one safe. Compared with people who had received a placebo, people who got the cortisol were more likely to choose the safer bet, Coates and colleagues report February 18 in the Proceedings of the National Academy of Sciences.

The results suggest that people’s comfort with risk shrinks during periods of calamity. During a stressful financial crisis, people’s inclination to avoid dicey investments may make the market even worse, the authors write. These shifting risk tolerances may be an ignored source of market instability.