New research suggests that hormones play a role in financial decision-making.

Specifically, cortisol, a hormone that marks stress, is positively related to the disposition effect, meaning holding on to underperforming assets for too long or selling overperforming assets too soon, according to the research by John Nofsinger, the William H. Seward chair in international finance at the University of Alaska, Fernando Petterson, an assistant professor of finance at North Carolina Central University, and Corey Shank, an assistant professor of finance at Dalton State College.

The research, which is set to be published in the Journal of Behavioral Finance, also found both cortisol and testosterone are positively related to portfolio turnover.

“We don’t really know where the investment biases come from,” Nofsinger says. “We can say we have risk aversion, we can say we have loss aversion, we can say we have a home bias, we can find a lot of biases that we have that do not seem rational and we know that some people exhibit these biases more often than other people do, but we don’t really know why. And so I decided . . . our biological differences could be driving some of these biases. That’s where the genesis of this idea and this paper came from.”

The researchers used a financial simulation by monitoring participants while they worked through two multipoint portfolio rebalancing tasks involving long-term investment decision-making. “We have them come in at the beginning and they do a saliva test, which is just some saliva in a test tube, and then that’s all sent off for testing their hormone levels, specifically testosterone and cortisol,” says Nofsinger. “They go through this process — this kind of game — and we see how they all did and then empirically we can look for the various biases that we were studying. Then we can compare it to their hormone levels and see who committed these biases more and who committed these biases less and [whether] that [was] correlated with their hormone levels.”

While it wasn’t covered in the paper, an interesting point to note is that testosterone and cortisol levels change throughout the day and it may make sense for people to make certain decisions at times with more normalized levels of hormones, he adds.

“From a practical standpoint, market participants would benefit from understanding how their physiological makeup influences their financial choices and resulting performance,” the paper noted. “This is particularly important in the finance profession, which is highly male-dominated and among the most stressful. Based on our results, we strongly advocate the use of awareness, reflection and monitoring of endocrine functions that may affect judgment during financial decision-making.”

The study of psychology’s impact on investing has been going on for decades, but the field of biology or physiology in finance is a new wave, Nofsinger says. “Imagine you have your Apple Watch that tells you your heart rate and what mood you’re in and you have an app that combines whether it’s sunny outside so that you’re in a good mood or not and all of these things — and it will tell you what your biases are for financial decision-making. Who knows what the future could hold?”