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Study: Lack Of Diversity Fuels Speculative Bubbles

A more diverse Wall Street would make a 2008 financial crisis 2.0 less likely, according to a new study.

White traders trust white traders more than others, which is why a group of white traders are more likely to drive prices up to irrational levels, as in the case of the housing bubble that led to the 2008 crisis, explain the authors of a paper published Monday by the Proceedings of the National Academy of Sciences.

In the study, 180 people with a background in finance who could calculate stock value and had similar analytical abilities bought and sold fake shares among themselves — for a real profit — reported The New York Times. In some of the experiments the traders were all white, but in others they were ethnically diverse, including African-Americans and Latinos.

The authors found that stock prices were about 20 percent more accurate than the proper price in the diverse groups than in the white groups, where stock prices were 33 percent less accurate than the proper price.

“Ethnically homogenous bunches of traders are more prone to make big-time errors,” David Stark, a sociologist at Columbia and co-author of the paper told The New York Times, “so various things that promote ethnic diversity on Wall Street can actually create gains in market efficiency.”

But he and his co-authors also said too much diversity can be counterproductive. “The presence of more than one ethnicity fosters greater scrutiny and more deliberate thinking, which can lead to better outcomes,” they wrote. “Such friction, however, can cause conflict and complicate collective decisions.”

A similar study cited by Forbes found diverse juries were less likely to make quick decisions, shut out opposing viewpoints or make factual errors.

“When we are surrounded by people who look like us, we tend to put confidence in their actions and sometimes this confidence is misplaced,” co-author Sheen Levine, of Columbia’s Institute for Social and Economic Research and Policy, told Business Insider regarding the Wall Street study.

Levine now plans to study the impact of gender identity on Wall Street trading.

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