High Testosterone Affects Financial Decisions


If you follow behavioral economics, you have most likely heard of the ultimatum game. It is played with two participants. The first is offered $40 and allowed to choose how much of that $40 to share with the second person. If the second person accepts the offer, the money is awarded to each as agreed. If the second person rejects the offer, neither gets any money. Economic theory predicts that the second person should always accept the offer. After all, $1 is better than nothing, but research has shown that people expect a little more fairness, and will reject lopsided offers. Now, probing further, one researcher discovered that men with high levels of testosterone are more likely to reject lowball offers.

As he describes in the Proceedings of the Royal Society, 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.

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.

Economists often refer to this sort of behaviour as irrational. In fact, it is not. It is simply, as it were, differently rational. The things that money can buy are merely means to an end-social status-that brings desirable reproductive opportunities. If another route brings that status more directly, money is irrelevant.

A while back I wrote about testosterone and new venture creation, and wondered if higher testosterone encouraged bad decision making. I suspect poor M&A decisions by CEOs stem from the same root causes explored by this research.