The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading

Traditional finance theories state that asset prices are determined by firm fundamentals, such as per-share earnings and relative risk. However, a growing body of literature shows prices often do not reflect underlying value and are largely formed by expectations of future cash flows that are discordant with financial fundamentals and are vulnerable to cross-sectional sentiment influences. This paper demonstrates asset mispricing by a biological driver of competitive bidding — testosterone — in experimental asset markets. We show that testosterone drives competitive bidding leading prices to dissociate from fundamental value, producing larger and longer-lasting bubbles. Further, testosterone reduces trading performance and increases trader overconfidence.