Herd behaviour can make us do stupid things — a phenomenon that’s no stranger to Wall Street. Now, it turns out, we could be even more prone to blindly mimicking others when those others happen to look like us.
Researchers at Columbia university found that stock market traders in ethnically homogeneous groups are more likely to accept speculative prices and overprice stocks, leading to more frequent bubbles.
Meanwhile, groups of ethnically-diverse traders are 58 per cent better at pricing stocks, they found.
It’s all summed up in a paper called “Ethnic Diversity Deflates Price Bubbles.”
“When we are surrounded by people who look like us, we tend to put confidence in their actions and sometimes this confidence is misplaced,” said principal investigator Sheen Levine, who teaches at the Columbia Business School.
He and sociologist David Stark set up their own 6-person stock markets — some ethnically diverse and others homogeneous — and incentivized each trader with real cash for keeps.
First they held the experiment in Singapore, where the ethnically diverse markets included Chinese, Indian, and Malay traders. Then they held another in Texas, where markets were made up of white, African American, and Latino traders. Both experiments led to similar results.
Next up, Levine plans to study the impacts of gender diversity on the trading floor.