Ethnic diversity on the trading floor could deflate stock bubbles

Research from the University of Warwick has shown that markets of ethnically diverse traders are much less likely to suffer stock bubbles.

The research was led by Warwick’s David Stark and Columbia University’s Sheen Levine. Their findings were published in the scientific journal Proceedings of the National Academy of Sciences.

The study has revealed that trust in irrational behaviour, one of the proposed causes of behind stock bubbles, is far more frequent in markets made up of traders who are ethnically the same.

Traders are more likely to accept transactions without asking too many questions when doing business with ethnic peers.

In comparison, the scrutiny needed to avoid stock bubbles is more commonly based in ethnically diverse markets where the distrust between ethnically different people is more prevalent.

The study was conducted by constructing experimental securities markets as a laboratory for bubbles.

The true value of a stock could be pinpointed in this experimental set up and compared with market prices in order to identify bubbles as soon as they appeared to measure their exact magnitude.

The researchers then randomly assigned participants to ethnically homogeneous markets or ethnically diverse markets, letting them trade stocks to earn cash.

When trading began, the research found that homogenous markets were more likely to bubble than ethnically diverse ones. In contrast, market prices fit true values 58 percent better in diverse markets.

Christina Stuart, a first year student of Philosophy, Politics and Economics (PPE) said, “Coming from an ethnically diverse background, I find it stunning that the distrust between races can be empirically measured.

“It’s disappointing to think that in such a globalising world there is still underlying suspicion between ethnicities.”

Dariaa Mykhailyshna, another first year PPE student, remarked: “I think that if findings of this study can be confirmed by further research, they may be used in political and social debates by those who support immigration and ethnic diversity.”

This research experiment highlights the benefits of ethnic diversity. It also questions the practical significance of the findings in light of the fact that many trading environments, including Wall Street, are not very ethnically diverse.