Those with lower levels of the hormone in their saliva at 11 a.m. made, on average, lower profits or lost money the rest of that day, says John Coates, a former Wall Street trader who is now a senior research fellow at the University of Cambridge in England.
For eight days, twice a day, he took saliva samples from 17 men working on a mid-size London trading floor.
"We found that a trader's morning testosterone level predicts his day's profitability," he and his colleague, Joe Herbert, conclude in a paper published yesterday in the online edition of the Proceedings of the National Academy of Sciences.
It is the first study to make a connection between hormones and trading, but forget about asking your broker for a spit sample.
The experiment was a preliminary step, says Dr. Coates, towards understanding the role testosterone and other hormones play in financial risk-taking.
There may be an optimal level of testosterone for male traders; too little may contribute to a poor performance on any given day, but too much may lead to bad decision-making.
In male animals, testosterone plays a well-documented role in what is known as the "winner effect."
The lizard that wins a fight, for example, has a higher level of testosterone than the loser. This gives him an advantage going into his next fight. But at a certain point, too much testosterone impairs an animal's performance rather than improving it; he takes too many risks, runs into the open and gets eaten.
Dr. Coates, who is from Toronto, worked on Wall Street for Goldman Sachs Group Inc. and Deutsche Bank New York. But he has always been fascinated by the brain, and during the dot.com bubble in the late 1990s, he began wondering if there was a connection between hormones and trading behaviour.
Game theorists argue that people know there is a bubble, and will try to get out before it bursts, says Dr. Coates. But he doesn't buy that explanation.
"I thought people were on a chemical. ... They were high, and when the whole thing collapsed they were like people with a hangover saying, 'How could I have bought that dot.com company that had no earnings, no credible business plan - and I thought it was the future.' "
Could testosterone be the dot.com chemical? Dr. Coates began informally studying endocrinology and in 2001 left Wall Street. He returned to Cambridge, where he had done his doctorate in the economics department, to test his hypothesis that hormones play a role in financial risk-taking.
Dr. Coates wanted to include female traders in his experiment, but says there weren't enough working on the trading floor where he did the study to get a good sample size. Testosterone is often described as a male hormone, but it also circulates in women's brains.
The sampling was done in June, 2005, and the traders were between the ages of 18 and 38. They could trade a wide range of assets, but had their largest exposure to the German markets and, in particular, to German interest-rate futures. The traders make between $24,000 and $10-million in take-home pay a year.
One trader averaged twice his historic profit and loss during a six-day winning streak, and saw his mean daily testosterone levels rise 73 per cent.
"It is a very provocative paper," says Bruce McEwen, a leading expert in how stress and sex hormones affect the body and brain who works at The Rockefeller University in New York. He was not involved in the research, and says it is intriguing because it suggests hormones play a role in both good and bad financial decisions.
Neuroeconomics is a hot area of research, Dr. McEwen says, and experiments have shown that particular areas of the brain are active when people make financial decisions, for example whether to take a small, immediate reward or wait for a bigger payoff later. Now, he says, it is clear that hormones are also part of the picture.
Dr. Coates also analyzed levels of cortisol, a stress hormone, in the saliva samples he collected, and found the traders had higher levels on more volatile days.