Ethnic Diversity Reduces “Groupthink,” Economic “Bubbles”

Most people are unlikely to trust recommendations and evaluations from people of different ethnic groups.

Sheen Levine

Sheen Levine

However, this bias may reduce the “herd mentality” that characterized price “bubbles” in U.S. housing and global financial markets, reported Columbia’s Sheen S. Levine, Evan P. Apfelbaum of MIT, Goethe University’s Mark Bernard, Texas A&M’s Valerie L. Bartelt, Edward J. Zajac of Northwestern, and University of Warwick’s David Stark.
They concluded that, “Diversity facilitates friction that enhances deliberation and upends conformity.”

Economic “bubbles” occur when the majority of traders set inaccurate prices, probably influenced by a type of  “groupthink.
This cognitive error results in a mismatch between market prices and true asset values.

Irving Janis

Irving Janis

Groupthink can occur when three conditions interact, according to Yale’s Irving Janis:

  • Group Cohesiveness
    • Deindividuation” occurs when group belonging becomes more important than individual dissenting views,
  • Group Structure
    • Homogeneity of group’s social backgrounds and ideology,
    • Group insulation from feedback,
    • Lack of impartial leadership,
    • Lack of norms to conduct systematic analysis and clearly structured decision procedures,
  • Context
    • Stressful external threats,
    • Recent failures,
    • Decision-making difficulties,
    • Moral dilemmas.

      Scott E. Page

A wider range of viewpoints leads to less groupthink and more balanced decisions in a mathematical model developed by University of Michigan’s Scott E. Page and Lu Hong of Loyola University.

Diverse groups ran into fewer “dead ends” when they developed solutions than did groups comprised of individuals who tended to think similarly.

David A. Thomas

David A. Thomas

Likewise, Georgetown’s David A Thomas and Robin J. Ely of Harvard confirmed that identity-diverse groups can outperform homogeneous groups
summarized in a formula:

Collective Accuracy = Average Accuracy + Diversity.

To test the impact of group diversity on market “bubbles,” Levine’s group constructed experimental markets in Singapore and Texas, USA, in which participants traded stocks to earn money.

Evan Apfelbaum

Evan Apfelbaum

More than 175 volunteers with backgrounds in business or finance were randomly-assigned to groups of six ethnically-homogeneous or ethnically- diverse participants.

Traders knew the ethnic composition of their groups, but they couldn’t communicate with each other.
In addition, their “trades” of dividend-paying stock were anonymous.

Homogeneous groups set inflated selling prices, yet traders in those groups bought the stock, resulting in increasing stock prices.

Mark Bernard

Mark Bernard

In contrast, traders in diverse groups refused inflated selling prices, so the stock price fell to approximately the price in an “ideal” market with “rational” traders.

When traders and other decision-makers come from similar ethnic, social, and attitudinal backgrounds, they tend to place undue confidence in others’ opinions, and tend not to subject them to rigorous analysis.

Valerie Bartelt

Valerie Bartelt

As a result, people in homogeneous may be more likely to accept prices and deals that deviate from actual underlying values.
Levine’s group concluded that “homogeneity…imbues people with false confidence in the judgment of coethnics, discouraging them from scrutinizing behavior.”

  • How do you mitigate “groupthink” in organizational decision-making?

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©Kathryn Welds

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