April 16 (Bloomberg) -- Everybody relax. It looks like the credit crunch can be solved. Don't worry about complex ways to move assets back onto balance sheets, or swap one kind of collateral for another. Just curb your sex drive.

Brian Knutson, a professor of neuroscience at Stanford University in Stanford, California, and Camelia Kuhnen, a finance professor at Northwestern University in Evanston, Illinois, scanned the brains of 15 men who were asked to make financial decisions. They were shown images ranging from a couple in an erotic pose to neutral objects such as household appliances.

The finding? The guys were more likely to take a high-risk decision when looking at the picture of the raunchy couple than they were while ogling a vacuum cleaner. Women weren't tested because it's harder to find an erotic image that all respond to.

``Incidental reward cues can influence financial risk- taking,'' the study concluded.

It isn't hard to figure out what may be going on there. The men are driven to take more chances in the hope of accumulating greater wealth to attract women. When they are thinking about sex, they are more likely to take financial risks.

Of course, the research may not be valid: The experiment involved only 15 men, who may just spend all their time thinking about women. Then again, it is unlikely many people sitting around at hedge funds will shake their heads and mutter, ``Er, no, that doesn't sound right at all.'' It certainly sounds right.

John Coates, a research fellow in neuroscience and finance at Cambridge University's Judge Business School in England, reported the results of a two-week study of 17 traders in the publication ``Proceedings of the National Academy of Sciences.''

Crazed Decisions

A former derivatives trader at Deutsche Bank AG in New York, Coates found that when traders were on a winning streak, their testosterone levels kept rising until they made crazed, irrational decisions. It wasn't a huge sample, but, again, no one who has ever worked on a trading floor will say, ``Well, we've never seen anything like that happen.''

The more we learn about how financial markets work, the more we see they are driven by feelings such as greed, fear and desire. In reality, wild swings in stock prices are caused more by human nature than by mundane economic forces or regulatory shortcomings for banks and ratings companies.

People come up with new products, investments and trading strategies. Once they have been created, they are tested to destruction. The markets rise until the bubble bursts. Underlying that, there is the desire to impress people, to accumulate a fortune, or just to prove your own acumen.

G-7 Plan

So how can you tame that?

Of course, if traders are mostly thinking about sex when making decisions, the banks could always try and mitigate that.

At the meeting of the Group of Seven finance ministers in Washington last weekend, a 100-day plan was cooked up to calm financial markets. It included new rules to force banks to disclose their holdings, as well as boosting their capital. Regulators will have to come up with new ways of accounting for off-balance-sheet units and revise risk-management rules.

It all sounds very worthy -- and completely unconvincing.

The G7 should learn the lessons of countless studies that demonstrate the markets are primarily driven by the chemicals inside us and the emotions they create. We can come up with policies that alleviate the impact of volatile markets. But eliminate the price swings through regulation? You might as well try and regulate away the wind and the rain.

Waste of Time

Maybe the G-7 should insist that banks display calming pictures of fridges and ironing boards on their office walls to keep all their dealers a little more rational. Perhaps hedge funds should be compelled to add something to the coffee to sedate their staff. Or even better, banks could be encouraged to get more women on the trading floor.

More seriously, it would be better if G-7 finance ministers accepted that while you might be able to limit the aftershocks of financial volatility, you will never be able to abolish it. They needn't waste time on yet another tier of regulators who will look in the wrong direction when the next bubble appears.

Volatility is part of human nature. And there isn't much point in trying to regulate that out of existence.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: April 15, 2008 19:01 EDT