The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind

by John Coates

But we did make some headway in answering this question in the previously discussed study that looked at traders’ Sharpe Ratios, in other words how consistently they made money, their P&L corrected for the amount of risk they took in making it. In this study we used the traders’ Sharpe Ratios as a measure of skill, and asked quite simply, does testosterone improve traders’ skill, or does it increase the amount of risk they take? What we found was that testosterone did not improve their Sharpe Ratios, but it did increase the risk they took. We retain the belief that testosterone also has effects on the traders’ visuo-motor scanning and speed of reactions, although we will not be able to test this in the field. What our trading-floor studies did highlight, however, was that testosterone, a signal from the body, was having a large effect on the risk taking of traders, rising with above-average profits and increasing risk taking. These experiments thus provided good preliminary evidence that the winner effect does in fact occur in the financial markets.