In the world of finance, the tranquillity of the market is often disturbed by a sudden storm of volatility. This volatility, a measure of how much the price of an asset, index or market can change for a set volume of trade, is a crucial aspect of the financial landscape. Market turbulence is often seen as a negative feature due to the uncertainty it brings. However, it is also a reflection of the dynamic nature of markets, responding to a myriad of factors from macroeconomic data to traders’ sentiment. But have we ever wondered what’s happening in our brain during these turbulent times?

Imagine you are a trader. You sit at your desk, surrounded by screens flashing numbers in red and green. Your heart races, your palms sweat as you watch the market’s wild swings. You are caught in a whirlwind of decision-making under uncertainty. Recent research suggests that this stress response is not just a psychological phenomenon but is deeply rooted in our biology.

The human body responds to stress by releasing hormones, including cortisol. This hormone is known to ramp up when we are under pressure, priming our body for the ‘fight or flight’ response. However, what’s fascinating is that these hormones don’t just prepare our body to respond to threats, they also shape our decision-making process. A surge in cortisol levels can make us more risk-averse and can affect our financial decisions. This can lead to a chain reaction in the market as traders react to the shifting sentiment, contributing to market volatility.

This physiological reaction to stress is not a conscious choice. It is a product of millions of years of evolution, fine-tuned to help us survive in a world full of uncertainty. However, in the modern world of finance, this primal response can have unintended consequences. When traders are under stress, they may overreact to market events, creating a feedback loop that amplifies market volatility.

Now, let’s shift our gaze from the individual to the collective. Imagine a trading floor or even the global market as a giant brain, with each trader as a neuron. Each neuron, influenced by its own stress response, makes decisions that feed into the collective behaviour of the market. This collective behaviour, in turn, influences the individual, creating a dynamic feedback loop. This is the essence of the neurobiology of the market, a complex system shaped by the interplay of individual and collective decision-making under stress.

So, what does this mean for decision-makers in organisations? Understanding the neurobiology of decision-making under stress can provide valuable insights into the dynamics of market volatility. It can help decision-makers anticipate market swings and manage their response to market stressors. It can also inform strategies for managing stress at the individual and organisational level, promoting healthier decision-making and potentially mitigating the impact of market volatility.

In the end, market volatility, like a storm, is a natural part of the financial landscape. It is a reflection of the complex interplay of countless factors, including our own biology. By understanding the role of stress and hormones in decision-making, we can navigate the storm with a deeper understanding and perhaps, a little less fear.

References:
Coates, J. M., & Herbert, J. (2008). Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the National Academy of Sciences, 105(16), 6167-6172.
Cueva, C., Roberts, R. E., Spencer, T., Rani, N., Tempest, M., Tobler, P. N., … & Rustichini, A. (2015). Cortisol and testosterone increase financial risk taking and may destabilise markets. Scientific reports, 5(1), 1-12.
Fenton-O’Creevy, M., Lins, J. T., Vohra, S., Richards, D. W., Davies, G., & Schaaff, K. (2012). Emotion regulation and trader expertise: Heart rate variability on the trading floor. Journal of Neuroscience, Psychology, and Economics, 5(4), 227.