Financial markets may be more vulnerable to traders' stress levels than previously thought, according to a scientific study which found that high levels of the stress hormone cortisol can induce risk aversion.
Reuters reports that the findings, which turns on its head the assumption that traders appetite for risk-taking remains constant throughout market up and downs, suggests stress could in fact make them more cautious, exacerbating financial crises just at a time when risk-taking is needed to support crashing markets.
In a study of City of London traders and of the effect of cortisol on behaviour, researchers led by Dr John Coates - a former Goldman Sachs and Deutsche Bank derivatives trader turned neuroscientist - said this tendency towards caution could be an 'under-appreciated' cause of market instability.
Coates also said the finding could alter our understanding of risk - since up until now, financial and economic models have largely rested on the assumption that traders' personal risk preferences are consistent throughout the market cycle.
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