Economists have for some time argued that market models may benefit from assuming dynamic risk aversion. Instead of considering agents react to and perceive risk/reward in a constant way, agents change over time. Attempts followed in trying to model such changes.
A recent study on how cortisol shifts financial risk preferences brings light to a metabolic (partial) explanation for it.
“Previous evidence showed traders experience a sustained increase in the stress hormone cortisol when the amount of uncertainty, in the form of market volatility, increases.
Now there is evidence that participants became more risk-averse under effect of raised cortisol levels – and that the weighting of probabilities became more distorted among men relative to women.
These results suggest that risk preferences are highly dynamic. Specifically, the stress response calibrates risk aking to our circumstances, reducing it in times of prolonged uncertainty, such as a financial crisis.
Physiology-induced shifts in risk preferences may thus be an underappreciated cause of market instability.”