It is widely known that financial markets can become dangerously unstable, yet it is unclear
why. Recent research has highlighted the possibility that endogenous hormones, in particular
testosterone and cortisol, may critically influence traders’ financial decision making. Here we show
that cortisol, a hormone that modulates the response to physical or psychological stress, predicts
instability in financial markets. Specifically, we recorded salivary levels of cortisol and testosterone
in people participating in an experimental asset market (N=142) and found that individual and
aggregate levels of endogenous cortisol predict subsequent risk-taking and price instability. We
then administered either cortisol (single oral dose of 100mg hydrocortisone, N=34) or testosterone
(three doses of 10g transdermal 1% testosterone gel over 48hours, N=41) to young males before
they played an asset trading game. We found that both cortisol and testosterone shifted investment
towards riskier assets. Cortisol appears to affect risk preferences directly, whereas testosterone
operates by inducing increased optimism about future price changes. Our results suggest that
changes in both cortisol and testosterone could play a destabilizing role in financial markets through
increased risk taking behaviour, acting via different behavioural pathways.