Animal Spirits

John Maynard Keynes famously wrote that spontaneous optimism, or “animal spirits,” have more of an effect on our economic decision-making rather than rational calculation. Now we have proof.

A couple of Cambridge University dons had 17 stock traders in London give saliva samples twice a day. What they found was that when the traders’ bets paid off, their testosterone levels were significantly higher. That led to more confidence and often further winnings, leading to a positive feedback loop.

The researchers speculate that long periods of elevated testosterone can turn risk-taking into an addiction, exaggerating market moves. Of course, any investment’s long-term profitability depends of business strategy and economic reality, not the hormonal levels of the traders. But this study validates Keynes view: markets can act irrationally.

What do we make of all this? Short-term irrational fears and exuberance can offer the thoughtful investor real opportunities. But it takes discipline and staying-power to exploit them.


Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-03T18:23:15+00:00 April 23rd, 2008|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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