Did the Stress Response Worsen the Global Financial Crisis?
By now, most of us have probably heard of the stress hormone cortisol, which is released by the adrenal glands during the body’s fight-or-flight response. Cortisol has gotten a bad rap — it’s primarily known for causing weight gain, interfering with cognitive functions like memory, and contributing to health issues like high blood pressure and heart disease.
Cortisol has even been dubbed “Public Enemy No. 1” by Psychology Today, so as far as hormones go, I wasn’t sure its reputation could get any worse – but apparently, it could. Now, a study out of one of the UK’s most prestigious universities suggests that the much-vilified stress hormone may have even had a hand in worsening the 2007-2009 recession that rocked the global economy.
Prolonged Cortisol Exposure and “Irrational Pessimism”
Stock traders are among the most stressed-out financial services professionals, and a previous study of traders in London showed that these individuals contend with nearly 70% higher cortisol levels than the general population. In this most recent study, over the course of eight days, Cambridge University researchers artificially raised cortisol levels in 36 study participants until they were comparable to the elevated levels seen in traders. They were then given the opportunity to take risks and gain real monetary rewards by playing a computerized lottery. Initially, the cortisol spikes had little effect, but prolonged exposure to cortisol appeared to cut participants’ appetite for risk in half.
The researchers concluded that prolonged spikes in cortisol levels actually contribute to increased risk-aversion, suggesting that when the economy began to take a serious hit in 2008,financial risk-taking may have been critically halted “just when the economy needed it most: when markets are crashing and need traders and investors to buy distressed assets.” This anxiety-driven panic may indeed have made an already bad situation worse, the researchers determined. Their findings were published in Proceedings of the National Academy of Sciences.
This study is significant for a number of reasons. First, it upends the conventional wisdom that market volatility doesn’t impact the risk-taking behavior of investors and traders. “Many influential models in economics, finance and neurobiology assume risk preferences are a stable trait, but we find they are not,” the researchers wrote. Instead, heightened cortisol levels may actually lead to a sort of “irrational pessimism,” they said.
When markets are especially volatile, traders will tend toward getting rid of their more risky assets in favor of assets that are perceived as safer. When too many traders do this at once, it can further depress the price or riskier assets, which further depresses the economy.
This means that attitudes around risk-taking and caution could be “under-appreciated” in their impact on the global economy, according to lead researcher Dr. John Coates, a neuroscientist and former derivatives trader for Goldman Sachs and Deutsche Bank.
While these findings have some pretty fascinating implications for those with careers in finance, it’s also interesting to look at what it means for the rest of us – especially those of us who struggle with stress and anxiety.
It certainly makes sense that prolonged stress makes people less willing to take risks – financial or otherwise. I’m pretty certain that every person who’s dealt with anxiety has at least a few instances where they’ve opted to play it safe rather than taking a chance on something that could have brought a greater reward.
And while we may not be able to fully control stressful situations or completely avoid anxiety triggers, the bottom line is that we ARE able to bring down cortisol levels by living a healthy lifestyle and employing effective stress-reduction techniques. And whether you’re a high-powered financial professional or a stay-at-home mom, pretty much everyone can stand to benefit from reining in their stress levels – especially if it means we might be not only a little calmer, but a little more courageous, too.