A recent Cambridge University study pioneered by former Wall Street trader and neuroscientist John Coates has revealed something that all brokers and financial professionals should keep in mind. Understanding the implications of this study will help all traders be more successful when it matters most. It may even help prevent or shorten financial crises.
Coates’s study revealed that the human body releases the hormone cortisol when under stress. Cortisol is responsible for many things, and has been discussed in depth in relation to weight gain. Cortisol also has another effect; it tends to make people less likely to take risks. This happens because cortisol is a survival hormone that has become obsolete over time. When our ancient ancestors became stressed, it was usually a life-or-death situation. Cortisol increases weight gain because more fat stores increases survivability when food is scarce. Risk-taking behavior is also not conducive to survival, so cortisol decreases this behavior in order to increase survivability. The problem is that the same situations in which cortisol were useful to our ancestors no longer apply to us. Many issues that cause stress in modern life are not related to food or survival.
This is apparent most clearly in the stock market. The market survives on risk-taking behavior. In fact, almost everything about trading revolves around risk. When risks are not taken, wealth doesn’t have a chance to grow. Of course, a financial crisis creates stress, especially for brokers and traders. Due to the effects of cortisol, traders are actually less likely to engage in trading when they are under stress. The problem then becomes compounded because the best way to deal with the crisis and restore the market is to trade actively and take more risks. When the market “freezes” due to traders’ unwillingness to trade, it cannot recover.
What This Means for Traders
This study gives traders what they need the most. It gives them the real reason why they aren’t trading. The human brain is powerful enough to overcome instinct, hormones and biology when the person understands what is happening. Traders must not let outdated biology stop them from playing the market and making profit. Once this biological fear is overcome, market activity can resume and the economy can be well on its way to recovery. This is news that should be shared with the entire financial world or maybe keep it for you if you believe it give a competitive edge.