Alan Greenspan, the former chairman of the US Federal Reserve, recently lamented that economics will never have a perfect model of risk. The problem, he said, is that economists cannot fathom the will o’ the wisp of market sentiment. Yet today, neuroscience and endocrinology may help us understand these troublesome spirits. For the waves of irrational exuberance and pessimism that destabilise the financial markets may be driven by naturally produced steroid hormones.

Steroids such as testosterone and cortisol affect our moods, memories and behaviour. Testosterone, for example, surges in males as they prepare for a competition, and continues to rise in the winner while falling in the loser. The winner, primed by elevated testosterone, experiences increased confidence and risk-taking and this improves his chances of winning again, leading to a positive feedback loop termed the “winner effect”.