The Biochemistry of Financial Risk

Testosterone. The word alone conjures up images of pumped-up body builders and pugnacious bullies, but the hormone—critical for human development in both men and women—has been receiving some decidedly down-to-business attention lately. Once studied primarily for its muscle-boosting abilities, newer research on testosterone has investigated the steroid’s role in everything from prenatal development to social aggression, baldness, and now an individual’s ability to stomach financial risk.

Testosterone’s links to risky behavior are nothing new. And while recent research has shown women to be generally more risk averse than men, no previous studies have linked those tendencies to testosterone. In a paper published in this week’s Proceedings of the National Academy of Science, Paola Sapienza (Associate Professor of Finance and Zell Center Faculty Fellow at the Kellogg School of Management), Luigi Zingales (Professor of Entrepreneurship and Finance at the University of Chicago), and Dario Maestripieri (Professor of Comparative Human Development at the University of Chicago) demonstrate that testosterone levels correlate with both financial risk-taking and career choice. Those with moderately high levels of the hormone approached monetary decisions with less caution and flocked to jobs in finance.

“The results are somewhat surprising because the effect is much stronger among women,” Sapienza remarks. “We were puzzled that the effect is not present in the part of the species that is known for testosterone.”

Sizing up risk aversion

Sapienza and her colleagues began the study in 2006 by measuring index-to-ring-finger ratios—a correlate of prenatal testosterone exposure—and collecting saliva to determine testosterone levels in 460 MBA students, an unusually large sample for a study of this kind. While the first round of saliva samples was being rushed on ice from the University of Chicago to Northwestern University for laboratory analysis, the students participated in a carefully constructed lottery—what Sapienza calls “a standard experimental measure of risk aversion” in economic disciplines. The researchers later gathered information on each participant’s career choice.

In the lottery, participants chose between the chance to win $200 and a guaranteed, albeit lesser winning. Each subsequent run jacked up the guaranteed amount, closing the gap between it and the uncertain prize. While some students consistently chose the risky prize and others the certain purse, many fell in the middle. The point at which those people switched from the lottery to the guaranteed winnings—and how those decisions compared to their testosterone levels—most interested Sapienza and her colleagues.

Their results challenge at least one cliché, that of high-testosterone risk junkies. Individuals whose testosterone was above a certain level were no more likely to select the lottery than they were the sure thing. But below that threshold, financial risk-taking and testosterone were strongly linked, both in the lottery game and in the students’ eventual career choices. The trend in the lottery game was especially evident among women. Lower levels of the hormone correlated with greater financial caution, and those with lower testosterone were women more often than not.

More than gender

While gender may help explain some of this variation, the real driving force may be the hormone itself. When Sapienza and her colleagues examined the career choices of those who fell under the testosterone threshold mentioned above, there was little discernable difference between the two genders. Higher testosterone, not gender, defined those who took a job in finance.

Still, higher testosterone may not a financial maven make. Greater risk may bring greater reward, but Sapienza cautions that she and her colleagues did not determine an “optimal” level of the hormone, one that would balance the benefits with the detriments.

“There is a misconception that high testosterone is always a good thing to have,” Sapienza says. Indeed, she says, medical studies have shown higher testosterone is associated with many health problems. Now it seems testosterone may also incur financial costs as well.

Yet Sapienza and her colleagues are only beginning to unearth the links between testosterone and financial risk. This study was the first part of a mammoth, forty-year undertaking. The participants will continue to document their life events, from the mundane to the memorable, through periodic surveys. Sapienza and her colleagues will mine this wealth of information in the coming years, exploring testosterone’s role in everything from lifestyle choices to financial portfolios.