Sep 26, 2011

Rogue Hormones,Trading, and Courage

An Economist article, Trader’s Brains:  Rogue Hormones, warns us that rogue traders — those who, caught up in the euphoria of successful market trading, allow their normally risk-averse stances and strategies to be overcome — might not be so uncharacteristic of high-volume, high-value, high-reward traders in general.  The research of Cambridge neuroscientist John Coates
suggests that hormones drive investment decisions to a far greater extent than economists or bank executives realise.
This might be somewhat bad news for those of us whose investment stakes and positions, mediated through institutional retirement funds, are measured by a much more modest scale as well, but also — for us Virtue Ethicists — provides an interesting occasion for thinking about the virtue of courage, the vice of foolhardiness, the phenomenon of lack of self-control, and the nature of prudential practical reasoning.

One would expect traders, if anyone, to be agents operating by eminently rational choice — true, attempting to predict the difficult-to-predict, operating often by hunch or in partial ignorance — working with goods and values that all admit of a common measure in money. One would expect careful, prudential, risk-averse or at least risk-conscious practical reasoning — decision-making — on their parts.

But, hey, these aren’t accountants or actuaries.  They carry their monetary and remunerative work out in high-pressure, and highly social, environments.  And, while human beings are rational animals, they remain just as conditioned by their animality as they are by rationality.  What are the implications of that.  Success exerts a seductive somatic effect:
When traders are on a winning streak, their testosterone levels surge, sparking such euphoria that they underestimate risk.
It can work the other way as well:
When they are acutely stressed, the adrenal cortex produces a flood of cortisol, a hormone that can make them overly fearful and risk-averse.
This, in fact, is what Coates focused on in particular, measuring cortisol levels on trading floors, finding that increased volatility — in layman’s terms the degree of change and lessened predictability in the market — correlated to increased cortisol levels.  One would expect this then to augur more risk-averse responses:
Chronic stress over weeks or months can produce so much cortisol that the brain focuses excessively on negative memories and perceives threats where they do not exist. This loss of judgment is exacerbated by other symptoms of stress, such as sleep deprivation.
Coates also suggests that many traders become and remain unaware precisely how high their cortisol levels actually are, since they don’t report being stressed, function well enough at their jobs, and yet endure greatly elevated levels of the hormone.

It would not be surprising to see a more dynamic connection between the somatic and psychological responses to success and volatility.  It would also not be surprising — though many would not think of this and would confine their analysis to somatic and psychological levels — if there were a moral dimension to this, one much less predictable and more complex and thus inadequately regular for social-scientific or brain-chemistry research — one that had to do with habitual dispositions that have long been thought through as courage, cowardice, and foolhardiness.

Aristotle famously defined courage as a virtue — a habitual mode of behaviour having to do with our feelings of fear and confidence — as the mean between the extreme vice of cowardice and the other extreme vice of foolhardiness, or rashness.  He also noted that behaviors can be of these sorts even if the agent doing them is not him or herself entirely or even at all virtuous or vicious.

A courageous person feels fear when it should be felt, to the degree it should be, towards the right objects, and so on — being in the middle is not just a matte of measure, but of appropriateness.  Likewise, the brave person feels confidence to the right degree, when it ought to be, towards the right objects, and so on.  Courage also involves acting on these feelings, standing firm in the face of that which is frightening.

The coward feels more fear and less confidence than he or she should, towards the wrong objects, when it is not appropriate, and they permit fear to determine their actions.  There’s two ways to go wrong on the other extreme, Aristotle says. One can feel no fear at all when one ought to feel it — there are some things, some situations, where fear is the truly rational, as well as emotional response.  Or one can feel some fear, but also too much confidence, more than is warranted by the situation, the threats and challenges, and one’s own powers, talents, resources, allies.

I don’t doubt that some traders actually fit the bill for being cowards, perhaps in general, perhaps specifically in their trade.  I also don’t doubt that some traders are foolhardy.  And, I’ll even bet that some are in fact courageous.  In fact, being able to endure and deal with chronically high levels of cortisal saturating one’s system might be due to courage or to foolhardiness — one would have to observe the person for some time and ask them about their actions and their reason to really get insight here.

Let’s assume, contrary to fact, that no traders are actually virtuous or vicious.  They would still engage trading actions and in patterns of action that are cowardly (unduly risk-averse), rash (unduly risk-ignoring), or courageous (just right, like Goldilocks down in the Pit).  They would also experience feelings of fear and confidence rightly or wrongly, appropriately or inappropriately.  Feeling and acting this way over time and consistently, of course, would eventually lead many of them into virtue or vice — but let’s set that aside for the moment.

What’s particularly interesting here is that we see that biologically one’s own past successes and the unpredictable behavior of others generates within the body hormones that produce — and confront the person with — their own feelings of fear and confidence.  These exude their emotional effects even into the supposedly cool-headed and completely cognitive calculation of risks and potential benefits and prudential practical reasoning based on adequately accurate assessment of risks and prediction of benefits.

What will permit a trader to not be affected, or to be affected less by these imbalancing hormonal influxes?  A kind of self-control that keeps one — even when feeling so confident that it seems impossible one might lose on a bet — on a steady, rational course of evaluation and action.  One that also stands up to more and more irrationally compounding fears and anxieties.  Well, as it turns out, that is what we do call and understand as Courage.

So, perhaps that virtue will be needed — and unable to be adequately understood by scientists — in the markets.  If so, it will need to be adequately understood, at least by someone, and I suspect Aristotle — especially, though not exclusively — would be a good interlocutor for that.

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