How Testosterone Leads to Overpricing on Wall Street - Ideas for Leaders
Idea #608

How Testosterone Leads to Overpricing on Wall Street

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.
Main Image
Main Image


New research shows that testosterone increases the over-confident and over-optimistic impulses of male traders, resulting in higher prices and more frequent bubbles. It also reveals, in general, that we are not always as rational as we believe.


Enthusiasm for your job is usually an asset. However, new research reveals that on Wall Street, such enthusiasm may backfire as the rush of winning triggers physiological changes that undermine rational thinking and decision-making. Specifically, the research studies the impact of increased testosterone levels on the buy-and-sell decisions of 140 traders taking part in a series of 17 experimental trading sessions. The researchers treated 84 of the traders with testosterone and the remaining 56 with a placebo in a double-blind experiment.

At the beginning of each session, the traders were given the chart of fundamental value of the asset they were trading, and had it with them during the entire experiment. Traders could follow the activity around the asset, including sales volume and prices.

Comparing the activities and results of the testosterone-treated traders with those treated with the placebo, the researchers found that:

  • Testosterone led to overpricing. The peak price of the traded asset was significantly higher than its fundamental value in the testosterone-treated groups than in the placebo-treated groups, and for a longer period of time. Traders in sessions where traders were given testosterone were willing to submit higher bids than traders given placebo and greater than warranted by the value of the asset. Sellers took the chance to ask for higher prices, believing (correctly) that the ask prices would be accepted. In short, traders in the testosterone groups attempted to “buy high” and “sell higher.” Placebo-treated traders followed a more conventional “buy low, sell high” strategy.
  • Testosterone led to larger volume. While the volume of trade was similar among the groups, the bid volume in the testosterone-treated groups was higher than the bid volume in the placebo-treated groups. Traders in the testosterone sessions posted significantly more buying offers even as the prices continued to rise, which contributed to the overpricing. Placebo-treated traders, on the other hand stopped trading when prices rose, which prevented the price climb in their sessions.
  • Testosterone led to more aggressive behaviour before and after price peaks. Price peaks didn’t discourage the testosterone-fuelled “buy high, sell high” strategy, as witnessed by the researchers both before and after the peaks. The high volume of post-peak sells by the testosterone-treated traders indicated an urgent effort to “unload” overpriced assets.
  • Testosterone encourages “momentum” trading. The researchers classified traders as either fundamental — that is, they were more likely to bid prices lower than value — or momentum — that is, they were more likely to bid prices higher than value. Momentum traders dominated the testosterone sessions.

While the research reveals how testosterone changes behaviours and decisions related to trading, the question remains: why. The researchers offer several possible answers.

The first is overconfidence. Higher testosterone levels lead to self-attribution — I’m winning because of my skills, not because of luck  — which only exacerbates risk-taking and overpricing actions. The second is unwarranted optimism. The testosterone-treated traders believed, rather irrationally, in future higher prices, which is why they pursued a risky “buy high, sell higher” strategy.

The final explanation is the effect on cognitive skills — the ability to think through and react to the complex and dynamic variables involved in trading. Planning, learning, and rapidly adapting to changing circumstances are all skills that can become diminished with the presence of increased testosterone. Instead of reflecting on the facts and acting rationally, testosterone-treated traders shift to an intuitive, impulsive reflection process. 


This research reveals that biology impacts the world’s markets. For the purposes of this experiment, testosterone was administered to the traders. However, rising testosterone levels is a fact in the real world of financial trading for two reasons: first, the excitement or “rush” of trading — especially in bull markets — raises testosterone levels in male traders; second, many traders take testosterone supplements to increase their aggressiveness and risk-taking.

The results of this research, therefore, reveal the threat of asset overpricing and financial bubbles (extended periods of overpriced assets) due to physiological reasons. Developing responsive risk management systems that can safeguard the markets from testosterone-driven financial bubbles is an imperative.

Beyond market policy, the research, in general, reveals the unexpected dangers of physiological changes in our bodies. Success in business requires rational thinking based on reality — represented in the research by the fundamental value of the traded asset. This research shows that we may believe we are acting rationally when in fact our behaviours, perceptions and beliefs are being modified by influences of which we may not be aware.

In sum, self-awareness is a work in progress, not an easily attained state of being. People must make an extra effort to recognize whether or not they are being rational in their decisions and actions.    



The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading. Amos Nadler. Working Paper (January 2016). 

Ideas for Leaders is a free-to-access site. If you enjoy our content and find it valuable, please consider subscribing to our Developing Leaders Quarterly publication, this presents academic, business and consultant perspectives on leadership issues in a beautifully produced, small volume delivered to your desk four times a year.



Idea conceived

January 16, 2016

Idea posted

May 2016
challenge block
Can't find the Idea you are after?
Then 'Challenge Us' to source it.


For the less than the price of a coffee a week you can read over 650 summaries of research that cost universities over $1 billion to produce.

Use our Ideas to:

  • Catalyse conversations with mentors, mentees, peers and colleagues.
  • Keep program participants engaged with leadership thinking when they return to their workplace.
  • Create a common language amongst your colleagues on leadership and management practice
  • Keep up-to-date with the latest thought-leadership from the world’s leading business schools.
  • Drill-down on the original research or even contact the researchers directly

Speak to us on how else you can leverage this content to benefit your organization.