The issue: testosterone affects risk
People with higher testosterone levels are more likely to take risks in investments and careers.
Anecdotal evidence and some research show women are, on average, more risk-averse than men when it comes to making financial choices.
A few years ago, a team of researchers and I wanted to better understand whether that risk aversion was a result of gender—in other words, nurture—or if it was biological. Turns out both predetermined and current levels of testosterone can help predict risk-taking behaviour.
During a 2009 study of 460 MBA students, we took two measures of testosterone. First we used the ratio between the length of the second (index) finger and the fourth (ring) finger as a marker of prenatal, or biological, testosterone exposure. The lower the ratio, the higher the exposure.
Second, using a saliva test, we measured the current testosterone level in each person at two different points in the study. Salivary testosterone fluctuates under stress.
Study subjects participated in a series of tests that forced them to choose between a certainty and a gamble. First, we offered participants $10 cash to keep, or the opportunity to enter the money in a lottery with possible winnings of $200.
In the next phase, those who opted to keep the cash in the first round were disqualified. Those who had bet money in the first round were offered a chance to keep $20 cash or bet again.
The certainty amount increased until all participants were disqualified. We correlated the lottery behaviour with both measures of testosterone and found both biological and circulatory levels of testosterone had an impact on people’s choices. Those with low levels were more likely to drop out of the lottery earlier, and proved to be more risk-averse.
Two years after the study, we met with those same subjects to determine how their testosterone levels affected their career choices. Again, we found a strong link.
Those with higher levels of testosterone were more likely to be traders or venture capitalists. Those with normal levels found themselves in more secure positions like teaching.
The study looked at an isolated population sample, but demonstrates how clients’ personal choices may provide insight into how they approach investments.
A client who chooses a relatively safe career, stays in the same house, and spends carefully is less likely to be interested in junk bonds.
Someone who moves frequently, has made numerous career changes, and thrives in a competitive or tumultuous environment, is likelier to want riskier investments. Most will fall somewhere in the middle.
What can advisors do?
Since you can’t ask clients to submit saliva samples, reframe introductory questions to tease out people’s preferences around risk. Don’t ask questions related to stock choices, or how they feel about market ups and downs. Instead, ask relevant life questions.
How competitive are you (and get an example)? In a street fight, would you be prepared to knock someone out? Would you prefer a risky job where you can get a very high raise, or a more secure one that pays less money?
Did you know?
Traders have long been subjected to genetic tests that attempt to determine how much risk they will take and how they’ll respond in high-stress situations. The ideal is to have a mix of traders, some more prone to risk and others more guarded.