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Hormones, Stress and Financial Decision Making

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Psychological Perspectives on Financial Decision Making

Abstract

Hormones exert powerful, but covert, effects on financial decision-making. These vary according to the context of the decision, the type of decision being made and features of the individual making that decision. There are differences, for example, between rapid decisions made under duress (e.g. trading) and more deliberate ones made cooperatively (e.g. management) and those made by trained professional or financial management in everyday life. This chapter focusses mainly on acute decisions. Most studies have been made on males, who have dominated professional finance. Financial decisions involve both cognition and emotion, though the two are not clearly separable. They involve both risk and reward evaluations, and hormones, particularly testosterone, cortisol and oxytocin, influence both. The rewarding function of money has to be learned, and this involves areas of the brain such as the amygdala, which are heavily influenced by steroid hormones. Decisions are influenced not only by reward (utility) but by emotions (e.g. ‘framing’). Stress, and associated levels of cortisol, can impair attention and risk assessment, and levels alter in response to uncertainty; however more prolonged increases may have different effects on risk appetite and impulsivity. Testosterone enhances competitiveness, aggression, risk appetite and optimism in finance as it does in its major role in reproduction. Testosterone levels are also sensitive to winning or losing, and this may affect subsequent decisions. In females, phases of the menstrual cycle alter risk appetite, which is maximal at midcycle. Oxytocin administration increases trust, an essential ingredient of financial transactions. Within each individual, it is the pattern of these hormones, and how they change, that determines the influence they will have on financial decisions, which should not be underestimated, though their roles have received little consideration in the world of finance.

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Herbert, J. (2020). Hormones, Stress and Financial Decision Making. In: Zaleskiewicz, T., Traczyk, J. (eds) Psychological Perspectives on Financial Decision Making. Springer, Cham. https://doi.org/10.1007/978-3-030-45500-2_3

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