Another Reason Why Diversity is Super Important
Diversity in a marketplace can help avoid bubbles, according to a study published by Prof. Evan Apfelbaum in Proceedings of the National Academy of Sciences (PNAS).
Study participants in East Asia and the Southwest United States were randomly placed in simulated trading environments, one ethnically homogeneous and one ethnically diverse, and told to trade stocks to earn money. The results were that the diverse traders were 58% better at pricing assets true to their market value than the homogeneous ones.
The homogeneous markets performed worse, according to the researchers, because participants were more willing to accept speculative trades, sometimes leading to bubbles and harder crashes.
Apfelbaum asserts that the findings are not related to the pricing skills of any of the markets but indicate the power that social context plays on trading decisions. As he put it, “the paper speaks more to the perils of homogeneity than the virtues of diversity. The most prominent effect is not the increase in accurate in diverse markets; it’s the sizable decrease in accuracy in homogenous ones.”
Source: Press Release MIT Sloan School of Management