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business school research

Leonardo DiCaprio, centre, plays Jordan Belfort in The Wolf of Wall Street, a Martin Scorsese film showing the excesses of the trading world.Mary Cybulski/The Associated Press

The Globe's bimonthly report on research from business schools.

Grossing nearly $400-million (U.S.) worldwide, The Wolf of Wall Street, Martin Scorsese's 2013 tribute to the hyper-masculine world of high-rolling stock traders in New York, was a box office hit.

But, according to a new study led by researchers at the University of Western Ontario's Ivey Business School, the University of Oxford and Claremont Graduate University, all those raging male hormones in the office are bad for business.

"The direct implication of this research is that men are vulnerable to hormonal influences that affect their decision-making and cognitive abilities, which can affect firm performance and risk profile," according to Amos Nadler, lead author of the study and assistant professor of finance at Ivey in London, Ont.

The research marks the first time testosterone levels have been directly linked to financial decisions that drive up stock prices and destabilize markets. Previous studies exist into testosterone and economic behaviours, such as risk-taking and competitiveness, but none test the causal role of the hormone in active financial trading, says Dr. Nadler in an e-mail.

"After all, hormones, behaviour and environment have reciprocal relationships that feed back into each other. I wanted to know whether testosterone would affect traders' behaviour and what those behaviours would do to market prices."

Specifically, Dr. Nadler sought to determine what men with higher testosterone would pay for stocks and how they would react to rising prices, as well as how those behaviours would shape aggregate market prices.

The researchers used a scientific approach used in medical research, treating traders with testosterone or placebo in a double-blind fashion.

The drug used to elevate testosterone in test subjects was the same drug being actively used by some Wall Street traders as a performance enhancer.

The study found that traders who were given testosterone (versus placebos) bid more frequently and sold stocks at higher prices, leading to a distortion of the market by overinflation of stock values. That behaviour held even though true values of stocks were known during trading.

Dr. Nadler says financial firms, which remain heavily dominated by men, can lessen the negative impacts of testosterone by instituting protocols that require traders to follow rational calculations rather than relying on instinct to make decisions.

"Creating a competitive environment among peers and allowing people to take risks with other people's money also has consequences, regardless of testosterone levels, and are worth discussing," he adds.

Since testosterone also affects the ability to work out complex scenarios and promotes impulsive and automatic thinking, industries outside finance can also learn from the study's findings, he says.

"The problem with this is that many modern environments and decision scenarios are complex, and thus impulsive decisions lead to the wrong decision. So whether the company does IT, entertainment, law or finance, the people running it ought to be aware of their own vulnerabilities and be committed to best practices and protocols that help them do the right thing, whatever that may be in the respective scenario," says Dr. Nadler, who earned his doctorate at Claremont near Los Angeles.

The paper, entitled The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading, has been accepted for publication in Management Science.

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