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
Leave a comment if you have any questions—I read them all!
Follow me on Twitter @GlobalMarketUpd