“Both feminist and mainstream economists have pointed out that the credit crunch is quite literally a man-made disaster, a monster created in the testosterone-drenched environment of Wall Street and the City.”
This quote from Ruth Sunderland in the Guardian – and there are many more examples in a similar vein – suggests that the global recession was at least partly driven by the hormone that has, in Western culture, become inherently associated with aggressive, masculine and risky behaviour. But to what degree is it fair to connect the crisis of the world economy to a single hormone?
University of Zurich economist Ernst Fehr has long believed that theoretical economics has failed to adequately take into account our social and biological nature when building models of decision-making. In a series of earlier experiments, scientists led by Fehr demonstrated that people could be made more trusting in an economic game simply by being given a dose of a hormone called oxytocin which had previously been implicated in social bonding and maternal behaviour. He has now turned his attention to investigate whether testosterone might also alter the way we interact and trade.
One paradigm used by Fehr to probe how social factors influence our decisions is the Ultimatum Game. In this game, a proposer divides a sum of money between himself and a responder and the responder then decides whether to accept or reject the offer. If accepted, both players get the money as split by the proposer; otherwise, neither receives anything.
Although this game is played only once and participants often never meet, responders have consistently been shown to reject offers which strongly favour the proposer. The proposer’s task therefore is to find an appropriate balance between fairness and selfish monetary gain.
In January of this year, Fehr and colleagues published their first findings on the effects of testosterone in the Ultimatum Game in the journal Nature. Against expectations, rather than making them more risk-taking and uncooperative, the women who received testosterone became more generous in their role as proposer, offering significantly more money to the responder than those who had taken a placebo.
Arguably, however, the most intriguing results emerge when Fehr examined the offers made by those participants who simply believed they had been given the drug, irrespective of whether they actually had. Those who reported that they had taken the hormone played the game less fairly, proposing to split money significantly more unevenly, compared to the women who believed they had received the placebo. In other words, while testosterone was working to encourage fairer offers, long-held notions of how testosterone should make us behave were paradoxically promoting selfish behaviour.
The precise interaction between hormones and economic behaviour, however, is likely to be complicated. Two studies published in Proceedings of the National Academy of Sciences last year reported contradictory results, with higher levels of testosterone being linked with reduced risk aversion in female MBA students but not in post-menopausal women. Moreover, testosterone may actually promote better trading in some real-life situations. In an experiment conducted on the City of London floor, John Coates and Joe Herbert showed that professional traders had higher levels of testosterone on days on which they enjoyed above-average returns.
During his 2010 Clarendon Lectures at the University of Oxford, Fehr argued that testosterone may only lead to aggression and risk-taking when such behaviour is necessary to uphold status in social situations. If true, it might turn out that testosterone is not the “monster of Wall Street and the City” but instead only turns into this when people feel required to take great risks to comply with expectations.