Biology And Volatility

Behavioral finance is a relatively new area of study and how biology affects behaviors is a hot topic. In a recent article, John Coates discusses how biology affects risk taking behavior. As you know, most people prefer less risk over more risk and, in finance, risk is all about uncertainty. As Coates notes, a study shows that an increase in cortisol levels reduces the amount of risk an individual is willing to undertake. So, traders who have increased cortisol levels should be less likely to engage in risky trades. In the past 20 years, the Federal Reserve has become more transparent and is now giving guidance on the likely future direction of the fed funds rate. Coates argues that since this change in policy began, the stock market has become more volatile, possibly because of the lower uncertainty around Federal Reserve policy. In other words, uncertainty about the fed funds rates could actually decrease the amount of risk traders are willing to take in their investments.