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Proc Natl Acad Sci U S A. 2014 Mar 4;111(9):3608-13. doi: 10.1073/pnas.1317908111. Epub 2014 Feb 18.

Cortisol shifts financial risk preferences.

Author information

1
Institute of Metabolic Science, University of Cambridge and National Institute for Health Research Cambridge Biomedical Research Centre, Addenbrooke's Hospital, Cambridge CB2 0QQ, United Kingdom.

Abstract

Risk taking is central to human activity. Consequently, it lies at the focal point of behavioral sciences such as neuroscience, economics, and finance. Many influential models from these sciences assume that financial risk preferences form a stable trait. Is this assumption justified and, if not, what causes the appetite for risk to fluctuate? We have previously found that traders experience a sustained increase in the stress hormone cortisol when the amount of uncertainty, in the form of market volatility, increases. Here we ask whether these elevated cortisol levels shift risk preferences. Using a double-blind, placebo-controlled, cross-over protocol we raised cortisol levels in volunteers over 8 d to the same extent previously observed in traders. We then tested for the utility and probability weighting functions underlying their risk taking and found that participants became more risk-averse. We also observed that the weighting of probabilities became more distorted among men relative to women. These results suggest that risk preferences are highly dynamic. Specifically, the stress response calibrates risk taking to our circumstances, reducing it in times of prolonged uncertainty, such as a financial crisis. Physiology-induced shifts in risk preferences may thus be an underappreciated cause of market instability.

PMID:
24550472
PMCID:
PMC3948282
DOI:
10.1073/pnas.1317908111
[Indexed for MEDLINE]
Free PMC Article

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