title: Ethnic diversity deflates price bubbles.
abstract: Markets are central to modern society, so their failures can be devastating. Here, we examine a prominent failure: price bubbles. Bubbles emerge when traders err collectively in pricing, causing misfit between market prices and the true values of assets. The causes of such collective errors remain elusive. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. In homogenous markets, traders place undue confidence in the decisions of others. Less likely to scrutinize others' decisions, traders are more likely to accept prices that deviate from true values. To test this, we constructed experimental markets in Southeast Asia and North America, where participants traded stocks to earn money. We randomly assigned participants to ethnically homogeneous or diverse markets. We find a marked difference: Across markets and locations, market prices fit true values 58% better in diverse markets. The effect is similar across sites, despite sizeable differences in culture and ethnic composition. Specifically, in homogenous markets, overpricing is higher as traders are more likely to accept speculative prices. Their pricing errors are more correlated than in diverse markets. In addition, when bubbles burst, homogenous markets crash more severely. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. The evidence may inform public discussion on ethnic diversity: it may be beneficial not only for providing variety in perspectives and skills, but also because diversity facilitates friction that enhances deliberation and upends conformity.
authors.affiliation: Institute for Social and Economic Research and Policy and Naveen Jindal School of Management, The University of Texas at Dallas, Richardson, TX 75080; sslevine@sslevine.com.
authors.forename: Sheen S
authors.initials: SS
authors.lastname: Levine
authors.affiliation: Work and Organization Studies, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142;
authors.forename: Evan P
authors.initials: EP
authors.lastname: Apfelbaum
authors.affiliation: Department of Economics, Goethe University, 60323 Frankfurt am Main, Germany;
authors.forename: Mark
authors.initials: M
authors.lastname: Bernard
authors.affiliation: Management, Marketing, and Information Systems, Texas A&M University, Kingsville, TX 78363;
authors.forename: Valerie L
authors.initials: VL
authors.lastname: Bartelt
authors.affiliation: Management and Organizations, Kellogg School of Management, Northwestern University, Evanston, IL 60208; and.
authors.forename: Edward J
authors.initials: EJ
authors.lastname: Zajac
authors.affiliation: Department of Sociology, Columbia University, New York, NY 10027; Centre for Interdisciplinary Methodologies, University of Warwick, Coventry CV4 7AL, United Kingdom.
authors.forename: David
authors.initials: D
authors.lastname: Stark
mesh_terms: D001210:Asia, Southeastern; D005006:Ethnicity; D005260:Female; D006801:Humans; D008297:Male; D040541:Marketing / Q000191:economics*; D017059:Models, Econometric; D009656:North America
keywords: decision making; diversity; economics; markets; psychology; sociology