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An academic (past trader) suggests how markets got high from elevated levels of testerone generated from succesful trading … as an asset class moves up the traders would collectively feel the rush of risk and return and want more… mania forming… markets full of mania … fueled by monetary excesses…

From the naked scientists  ….  John Coates, Judge Business School, Cambridge University says…

~~~~” We’ve been following a hunch I had when I was working on Wall Street during the dot-com bubble.

I was struck by the fact that traders at the time were acting very different from the way they were acting before the bubble and after the bubble. They were displaying classic symptoms of mania. They were overconfident.

They had racing thought, diminished need for sleep and they were carrying themselves in such an odd way I began to suspect there was a chemical involved.

The second thing I noticed was that women were relatively unaffected by the frenzy surrounding the dot-com bubble.

During that time I was splitting my time between the trading desk and Rockefeller University on the Upper East side. There I came across a very powerful model that’s been tested in a number of different animal species. I thought this model may be applicable to the financial markets.

In this model that’s called the winner effect two male animals go into a competition. Their testosterone levels rise in preparation for this competition. The winner comes out of this competition with even higher levels of testosterone. The loser comes out with lower levels.

The winner may go into the next round of competition with already elevated levels of testosterone. This can give him an added advantage.

It has effects on muscles and the cardiovascular system but more importantly it affects his confidence and his appetite for risk. He goes into this competition with a slight edge.

It’s what happens at the end-game of this model that’s really interesting. As the testosterone levels build up in these male animals they become overconfident so, for example, they go out in the open too much.

They pick too many fights, they patrol areas that are too large and they neglect parenting duty. They suffer an increased rate of predation. That’s exactly what I was observing in traders during the dot-com bubble. They take risks that are, quite frankly, stupid….” ~~~~