Chemical Reaction

I am going to put forward a controversial theory that came to mind.

Working within a neuroscience framework we know that people release hormones like cortisol (related to stress) and serotonin (related to happiness) within a normally distributed range. Then we have some people, call them outliers who either produce too much or too little of these hormones. Think here of your ADHD or extremely nervous trader.

I recall more than a decade ago reading Nobel Laurette Prof Robert Shiller’s book “Irrational Exuberance” where he questions the volatility in the stock market prices, when the dividends driving valuations move much less than the price. His thesis is that there must be more to valuation than simply discounting future dividends. The volatility ingredient in the mix is the emotional context of the trader/investor.

I would like to suggest that perhaps the volatility in the markets is simply an expression of the hormonal chemical reaction in the trading population. Here is a 5yr chart of the VIX (volatility index).

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