Deck 3: The Influence of Hormones on Financial Risk Taking; Sleep, Coffee, and Investing

Question 1

Why is testosterone known as the male hormone and cortisol known as the stress hormone? How do these hormones influence decisions?

Answer 1

Testosterone is produced in the testes by interstitial cells (also known as Leydig cells) in males starting at puberty and continuing for the rest of their lives. Testosterone production tends to slowly decrease in men after about 30 years. In both men and women, the adrenal cortex also produces small amounts of testosterone continuously from birth to death. Thus, both men and women have testosterone, though the level is much higher in men. Cortisol is known as the stress hormone because it assists the body in responding to stress by helping to maintain normal glucose levels. When a person is stressed, the amount of cortisol increases, which leads to an increase in the glucose in the blood.
After secretion, steroid hormones such as testosterone and cortisol enter the bloodstream and cross the blood-brain barrier. These hormones alter the production and function of synapses in neurons and the structure of brain cells. This implies that hormones can either stimulate or inhibit neural activity. Cortisol and testosterone receptors are located throughout the brain, including the frontal cortex, amygdala, hippocampus, and nucleus accumbens.

Question 2

How are testosterone and cortisol related to risk aversion?

Answer 2

Higher testosterone levels lead to more risk taking (so negatively related to risk aversion), while higher cortisol levels lead to less risk taking

Question 3

How are testosterone and cortisol related to irrational financial behavior?

Answer 3

Both higher testosterone and higher cortisol levels are related to investment biases such as portfolio turnover, the disposition effect, and building bubbles

Question 4

What do proxies of testosterone exposure show us about risk aversion?

Question 5

How does more than 24 straight hours without sleep or consistently getting less than 6 hours of sleep effect the body?

Question 6

How does poor sleep affect risk taking?

Question 7

What are two ways that researchers examine the effect of sleep on the aggregate stock market?

Question 8

How do stimulants like coffee affect financial decisions?