The authors simulate the impact of eight days of market volatility in a controlled environment by conducting a double-blind, placebo-controlled study in which volunteers are given controlled doses of a pharmaceutical form of cortisol via capsule and then asked to choose among various lottery scenarios. Participants with chronically elevated cortisol prefer safer lotteries. Physiologically driven shifts in risk preferences may be a source of financial instability that has been overlooked by economists and financial analysts.

When people are stressed, their endocrine systems discourage them from risk taking. The authors’ findings point to an alternative model of risk taking that views risk preferences as highly dynamic rather than stable. Their findings suggest that during a crisis, cortisol could fuel a flight to safety among investors that reduces risk appetite, further driving down prices and exacerbating market declines. Physiology-induced shifts in risk preferences have a powerful impact. By one measure, participants’ appetite for risk drops by 44%. Rising stress hormones may explain why markets swing from undervaluation to overvaluation—from “irrational exuberance” to “irrational pessimism.” The authors’ model contributes to research that seeks to explain why the risk premium on equities rises and falls with volatility.

The study is built on previous research involving professional traders in London, which revealed that those with higher levels of testosterone accumulated higher profits. In this study, 36 volunteer participants—a relatively small sample size—played computerized choice games that observed the way they valued the payouts of a series of lotteries and how they weighted the probabilities of each payout. Risk-averse participants with elevated levels of cortisol overwhelmingly preferred the safer bet (i.e., bets offering a higher chance of winning even if the expected return is lower).

Cortisol is produced by the adrenal gland, is generally secreted in response to stress, and generates a “flight or fight” reaction. To replicate stressed conditions, one group was given hydrocortisone (the pharmaceutical form of cortisol) followed by an inactive period and then a period with a placebo. The second group had the same sequence reversed, whereas the third group received the placebo throughout. Participants became dramatically more risk averse over time. After eight days of taking the hydrocortisone, they chose the risk-free lotteries nearly 80% of the time.

The study distinguishes between the effects of acute, short-lived hypercortisolism and chronic, sustained exposure. The researchers find that a short-lived increase in cortisol levels does not have much effect on risk aversion. Targeted changes in cortisol levels were realistic in the sense that they fell within a normal physiological range and dosages were tailored to each individual rather than using a one-size-fits-all approach. The authors’ goal was to increase everyone’s cortisol levels by approximately 68%, which is similar to levels previously found in real-life traders.

The study is very practical because physiology and investment behavior do interact in the real world. Investor behavior has long been considered a matter of personal preference. It is important for investors to be aware that subclinical levels of stress, which they are only dimly aware of if at all, are meaningfully altering their ability to take and evaluate risks. Risk managers and central banks cannot hope to manage risk if they do not understand the invisible and variable drivers of risk taking that are deep within the human body. Aversion to uncertainty and monetary loss could also be an unwanted and unforeseen consequence of medically prescribed synthetic glucocorticoid therapy.