Diversity Rules in Nature and Maybe in Financial Markets, Too

Anthony Effinger, Bloomberg, December 23, 2014

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Now, Bloomberg Markets magazine will report in its February issue, research suggests that it may protect financial markets from manic excess. Bubbles form when traders trust others’ judgment without scrutiny, and that happens more in ethnically homogeneous markets, according to a new paper in the Proceedings of the National Academy of Sciences by Sheen S. Levine and David Stark of Columbia University.

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To test their thesis, Stark and Levine created six-person minimarkets, some ethnically similar, others diverse. They chose two locales: Singapore, where they recruited Chinese, Malays and Indians, and Texas, where they tapped whites, blacks and Latinos.

Each group traded fake stocks for real money for 10 rounds. In each round, the true value of the stocks depreciated by 10 percent. Prices should have fallen, too–and, in the diverse groups, that’s what happened.

Pricing accuracy

But in the homogeneous ones, prices often stayed nosebleed high as traders willingly accepted bubble prices from their counterparts. Pricing accuracy proved 58 percent higher in diverse markets, the authors found. In Singapore, where almost all subjects had taken an economics or finance class, it reached almost 90 percent.

We humans tend to let our guard down and go with the flow in homogeneous settings, says Stark. We accept inflated offers and become more likely to spread others’ errors.

“If there’s some diversity, you’re on your game,” he says.

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  • Publius Pompilius Quietus

    “[I]n the homogeneous ones, prices often stayed nosebleed high as traders willingly accepted bubble prices from their counterparts. Pricing accuracy proved 58 percent higher in diverse markets, the authors found.”
    —————————-
    These analysts make a mistake in thinking that increased pricing accuracy is a result of diversity, rather than a

    • Daniel McGrath

      Could be a break down of competence too. That will deflate a stock super quick.

    • WhiteGuyInJapan

      Perhaps we feel more empathy with our co-ethnics and want them to make a bit of money to feed their kids. We feel less empathy towards outsiders and so are more willing to haggle over the price.
      Speaking of trust, the domination of the diamond industry by Hasidic Jews seems to increase trust and produce a cleaner, safer buying market for consumers. The Hasidim have strict rules about dealing their own plus they tend to marry each other, thus providing further disincentive to lie about the quality of the goods. Homogenity can breed high levels of trust, depending on the population.

    • IBWHITE

      Now they need to study the odds of being swindled by diversity players compared to homogeneous players.

  • So we’re supposed to rip the entire fabric of our society apart just so there aren’t any Wall Street bubbles?

    • APaige

      Its strange because ‘Trust’ is much more important than diversity.

    • Usually Much Calmer

      No. Staunching market bubbles is just being pressed into service. You knew that.
      Diversity because six million jews or whatever.
      It is not just generals who are fighting the last war, we all close the barn door after the mare has fled.

    • El Baga Doucha Libtard

      Lose monetary policy also creates bubbles. The Federal Reserve wouldn’t feel the need to create bubbles (by way of easy monetary policy) in the first place if our economy had a solid foundation, which it would have if we weren’t so blessed with diversity.

  • JackKrak

    Well, gosh, Mr. Effinger, we’d better get more Mexicans, Nigerians and Pakis in this country pronto so we can get better prices on everything – thanks!

  • TruthBeTold

    The inverse would be that diversity makes people more skeptical and hence won’t take chances on investments.

    Diversity could slow markets and cause lower profits.

    • Usually Much Calmer

      Yes. That may be why socialist utopia and diversity are holding hands right now. Socialism’s raison d’etre is to remove risk and it also slows growth.

      Both trust and skepticism are necessary.

  • superlloyd

    Diversity means negroes and this is just more BS propaganda to open the doors of the financial markets to low IQ negroes with their low impulse control, inability to forsee future consequences and and criminal proclivities. That should work out well. I loathe liberals like these dumb academics who are absolutely clueless as to the true nature of the Africans in our midst.

    • Anonymous

      No it does not. SWPL prep schools and university have figured out how to be racially diverse without being dysfunctional. We are selective about which non-Whites we are willing to hang out with.

      • superlloyd

        Dream on, Mr. Dupe.

  • shawnmer

    Wonder if the propagandists thought this one through. The necessary corollary to skepticism in “diverse” markets is that we apparently don’t trust each other!

    Pretty devastating to “diversity is our strength!”

  • Usually Much Calmer

    You can get endo-ethnic skepticism in 2 ways. The first is to have low trust be the basal state among the ethnic group. This is folly. Trust with checks is better than no trust both logically and empirically. The second is to have metropolises. Large groups of ethically similar people with absolutely no social ties. Cities are the wealth of nations because they are punishing places.

  • Rhialto

    I assume the paper by Levine and Stark, also proves that the behaviour of the subjects in these experiments correlates strongly with what real traders will do in real markets. If it does not, the research is of little value (except as Liberal propaganda)

  • freddy_hills

    First, the test subjects weren’t traders. So it’s not guaranteed they would behave the same as professional traders. And, second, stock markets are already diverse. People all over the world own shares in American companies and vice versa. It didn’t seem to stop the 2008 bubble in real estate. In fact, it was foreign banks buying bundled subprime mortgages from American banks that helped fuel it.

  • Chris Granzow XI

    “” We humans tend to let our guard down and go with the flow in homogeneous settings, says Stark. We accept inflated offers and become more likely to spread others’ errors.
    “If there’s some diversity, you’re on your game,” he says. “”

    Truer words have never been spoken. You can observe this in the way that whites from majority-white areas initially have their guard down around blacks (and other race in general). Whereas whites from cities with higher levels of “diversity” tend to be more on top of their game, more guarded, focused and aware of their surroundings.

  • Daniel McGrath

    Are they going to use this to excuse the colapse of real estate once an area goes black?

  • Jacobite2

    They say home is where you can scratch where it itches. You can relax at home, because you can trust family. Not 100%, but many times more than you can trust outsiders. When people spin heterogeneity, they’re telling you that nowhere will feel like home to you — you’ll never be with only your own people. This is not normal human behavior. There are two types on people on planet earth — your people and everybody else. Bloomberg? ‘Nuff said?

  • Jacobite2

    Stock markets, I know nothing about. But to state that diversity rules in nature is half-witted. Toss a strange wolf into a functioning pack and stand back. Or wear a rubber suit. Among social animals, including, but not limited to Homo sapiens, diversity is unknown in nature. As in, never happens — ever. A society is a group of individuals sharing a common origin (i.e., ancestry), language, religion, culture, customs, etc. Accent on “shared” and “common”.

  • Just like stocks, diversity causes house depreciation, too!