Despite progress in raising awareness about implicit bias and stereotypes, most people are less likely to trust recommendations and evaluations from people of different ethnic groups.
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, probably influenced by a type of “groupthink,” set inaccurate prices.
This leads to a mismatch between market prices and true asset values.
Groupthink can occur when three conditions interact, according to Yale’s Irving Janis:
- Group Cohesiveness
- “Deindividuation,” when group cohesiveness 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 requiring systematic analysis and decision procedures,
- Stressful external threats,
- Recent failures,
- Decision-making difficulties,
- Moral dilemmas.
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 worked to develop solutions than homogenous groups comprised of individuals who tended to think similarly.
Likewise, additional experimental evidence by Georgetown’s David A Thomas and Robin J. Ely of Harvard confirmed that identity-diverse groups can outperform homogeneous groups.
Group errors depended on group member ability and member diversity, expressed in the formula:
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.
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 during 10 rounds were anonymous.
Homogeneous groups set inflated selling prices, yet traders in those groups still bought the stock, resulting in increasing stock prices.
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.
As a result, they 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.”
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