Real Men

Too much testosterone can cloud our financial judgment.

Back in June, The Economist discussed a study that proves it. In the experiment, subjects played a simple game in which pairs of players divided and received money from a central pot. One player would propose how to split the pot -- and the other player would decide whether to accept -- for instance, $35 for the splitter and, $5 for the decider. If the decider accepted, both took their cuts. If the decider refused, neither got any money.

An economically rational decider would always accept the offer, no matter how low, because any payoff is more than zero. In practice, something gets in the way, and deciders will sometimes rather take nothing at all than accept an offer considered too low.

Here's where it gets interesting. In this version of the experiment, the players' testosterone levels were checked, and those with higher levels of testosterone were more likely to reject the low-ball offers of money. According to The Economist, "The responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer, but only one of the 19 others made the same decision."

In short, too much testosterone got in the way of their making the most obvious, and profitable, financial decision.

Jeff Mortimer: Lessons From the Trenches

My first big lesson was during the crash of 1987. I remember sitting next to a Quotron, watching tick by tick as clients’ money just melted away. The calls were pouring in. Many clients wanted to bail. But the reality was, it was too late to sell. “Stay put,” we told them. “Don’t panic. This market will rebound. If you panic and sell now, you’ll miss out.” In fact, two years later, the market was back. If you had sat tight, you’d have weathered the storm.

When everyone else is losing their heads, you’ve got to keep yours. And it’s as true in up markets as in down. Remember 2000, when tech-heavy investors insisted there would be no end to the bull run? They refused to rebalance their portfolios. They pushed their bets, and when the bubble popped, those portfolios suffered.

The key is discipline. You’ve got to think like a fiduciary of your own assets. Make your investment plan and stick to it. Be unemotional.