Ethnically Diverse Stock Trading Prevents Financial Bubbles

Researchers at Columbia University have found that when stock traders come from different ethnic backgrounds, they are less likely to inflate the value of the financial products they are trading. The result, say experts, could encourage multiculturalism in the financial sector as a way to hedge against financial bubbles.

In the experiment, 180 traders were grouped in either ethnically homogenous or diverse groups and then given the task of buying and selling shares from each other. In the homogenous groups, the accuracy of the pricing declined by thirty-three percept over the duration of the study. Accuracy in ethnically diverse groups, however, increased by twenty one percent relative to the stock fundamentals.

“To phrase it differently, people are more likely to trust that others who look like them will not to try to put one over, and assume that a price they are asking for a security must be reasonable. … Conversely, in the trading experiment, traders were more skeptical when operating in a more diverse environment, applying better analysis and logic.”

At base is the herd mentality, when individuals trust each other to a fault. In his Big Think interview, Princeton University professor of evolutionary biology Lain Couzin explains how our natural tendency to imitate each other leads to potentially dangerous positive feedback loops: