Role of testosterone in financial decision making

The gonads (Leydig cells in the testes for men and ovaries for women) create testosterone, which is also produced in small amounts by the adrenal glands in both sexes. Testosterone is found in far higher amounts in men than in women, and its job is to ensure survival. It is also known as the sex hormone, and it is responsible for raising libido in both men and women. When it comes to decision-making, several behavioural endocrinology studies have suggested that testosterone may play a role. Studies have shown that persons with high basal testosterone had a lower aversion to risk and a higher ability to deal with conflict, fear, stress, and threat. In a study conducted by Gideon Nave, Amos Nadler, David Zava, and Colin Camerer titled “Single-Dose Testosterone injection affects cognitive reflection in men,” several studies think that testosterone is to blame for men making riskier or poor judgments. A sample of more than 200 men was taken, and a double-blind study was conducted to ensure that the participants were unaware of whether they were receiving a testosterone placebo or not. They were then asked to take the CRT (Cognitive Reflection Test), which demands the participants to calm down and think things through before answering the questions, It was discovered that testosterone caused the subjects to trust their incorrect intuitions, which jumped to their heads; testosterone had no effect on mathematical abilities, but selectivity affected cognition; it was also discovered that the stress hormone cortisol causes the same tendency of giving a fast intuitive response.

When it comes to financial risk-taking, the neural and endocrine mechanisms associated with neuroeconomics will be similar to those found in other behavioural contexts involving risk assessment and decision-making, and the extensive psychological literature on learning and reward assessment will also be relevant (Camerer, 2008). Another study found that during puberty, when appetite for risk associated with financial gain is at an all-time peak, there is an increased appetite for risk associated with financial gain in both males and females, as well as increased activation of the Nucleus Accumbus, which is linked with rewards, despite the fact that this area is related to dopamine rather than testosterone, there is evidence that dopamine is required for testosterone-induced motivated behaviour, and testosterone helps to modulate dopamine transporters and receptors in the substantia nigra, according to research (Bell and Sisk, 2013; Purves-Tyson et al., 2014; Morris et al, 2015)

When it comes to adult risk-taking and testosterone, has shown that when heterosexual men are exposed to opposite-sex stimuli, their likelihood of taking greater financial risk increases, inferring that this sexual motivation is testosterone dependent. Testosterone also helps to maintain social status, implying that risk-taking behaviour may increase to maintain that status. When men with low testosterone levels were assigned in high-status positions, they demonstrated lower cognitive performance than those with higher testosterone levels, according to research.

In a study where traders were administered testosterone and instructed to play an economic game, it was shown that these traders were overly optimistic and more risk-seeking on days when their testosterone levels were greater because they were less risk-averse or their risk appetite was raised. As a result, testosterone may be responsible for increasing people’s readiness to accept more financially risky actions.

Another thing to keep in mind is that not all gender differences in the brain are due to testosterone; rather, many environmental and personality factors have an indirect effect on testosterone-dependent gender differences in the brain and can have powerful effects on any aspect of gender-related behaviour, including risk perception and risk-taking (Lenroot and Giedd, 2010). There is a 2D:4D digit ratio in gender differences in risk-taking that is lower in males than females; risk-taking behaviour also depends on the type of risk; lower ratio in males suggests stronger risk-seeking behaviour and lesser overconfidence, which is the reverse of what was discovered in females. It was also shown that empathy is a key aspect of making financial decisions, with women having a higher level of empathy than men (Auyeung et al, 2009). Because testosterone can be provided to limit generosity, it was discovered that men with more testosterone had less empathy and are more inclined to reject low offers in the ultimatum game.
As a result, we can conclude that testosterone, whether acting directly or indirectly, alters the activity of the anterior insula and inferior frontal lobe, which is associated with increased risk-taking; testosterone can also influence the amygdala, which can alter trustworthiness (in women); however, there is still a lot of research to be done to see if stimulants can affect brain function and risk-taking, which is difficult but not impossible.

By Bhumika Goswami

TY B.Sc.(Hons.) Economics