I have just finished reading The hour between dog and wolf by John Coates on the biology of financial risk taking. As a former derivatives trading Dr John Coates has first hand experience in the neurological patterns that traders experience during financial booms and busts and how this influences P&L account volatility.
The book is based on his years of academic research after returning to Cambridge University from industry to study a PhD in neuroscience and finance. He has since published considerable evidence refuting the neo-classical economic ideal that we choose our course of behaviour after thinking things through.
He argues that the aristotlean idea of the body and mind interconnectedness is a more coherent explanation for modern financial risk taking than traditional neck up economic rationalism.
The board tenant of the book is that the mind and body of traders works as a dynamic feedback loop, with testosterone being the molecule of irrational exuberance and a reason that ralllies change into bubbles.
One of Coates’ clear conclusion is that more female traders are needed to moderate the large fluctuations in financial markets. This resonates with some antecdote evidence I have from teaching my Trading Principles course on the MSc in Computational Finance and Trading. This course is based around real world trading simulations, and students are assessed on their trading book perfomance.
This year a third of the students where female. This cohort performed much better in their trading book cumulative NAV (measured over all 16 simulations). Also in the Law of One Price simuations the girls achieved much higher broker interest rebates, a clear indication that they are sucessfully offseting their risks from arbitrage trading.
Next year I hope to design a more scientific method to statistically confirm this antecdotal finding.