A recent post reminded me that Jason Collins really liked The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, by John Coates. Coates looks at how hormones are activated in traders. My guess is that I will get as much from Jason’s review as I would from the book. Jason writes,

In a bull market, testosterone surges through the population of traders. Each takes larger and larger risks, pushing markets to new highs and triggering further cascades of testosterone. Irrational exuberance has a chemical base.

Read the whole review. I would like to see the link between an individual short-term hormonal response and broad, long-term market trends established.

I do believe that there are cycles of financial intermediation. Remember how I think of financial intermediation. Households and businesses want to hold riskless, short-term assets while issuing risky, long-term liabilities. Financial intermediaries accommodate this by doing the opposite. When there is too little financial intermediation, opportunities to take reasonable risks are foregone. When there is too much financial intermediation, there is excessive risk-taking.

To a first approximation, I am not sure that simple trading of financial assets should boost testosterone on net, because financial trading is not positive sum. It’s not like “you want meat and I want shoes, so I’ll trade you meat for shoes.” Financial trading is closer to zero sum, which is why when you win you get high. The guy who sold you that stock that went up 5 points right after you bought it probably feels badly. So why should a bull market make more people feel high? Perhaps because as share prices increase, net financial intermediation is going up overall. That is, there are more short-term, low-risk liabilities being backed by more long-term, high-risk assets. Maybe that increased financial intermediation is accompanied by and reinforced by a hormonal response. Perhaps that is plausible, but it seems to me to require more of a stretch and, above all, more of a story of how markets react in the aggregate, or how System 2 and System 1 interact over long periods of time and across an entire array of market individuals and institutional relationships.