From the Financial Times, reprinted in (ungated format) at the Australian Financial Review:
When a team or market is dominated by any ethnicity, it tends to make worse decisions.
Behavioural psychologists have long established that markets are prone to herding and groupthink. It makes sense that a homogeneous team will be more prone to these problems. Now, the effect has been startlingly well demonstrated in academic experiments held far apart in Texas and Singapore:
- The findings: in a diverse market, traders scrutinised others’ behaviour more, and were less likely to assume that prices were reasonable. In homogeneous markets, traders trusted others.
- “It’s not a story about diversity boosting performance, it’s about homogeneity tanking it. It’s about making white people do a better job.”
The extent of the effect was stunning:
- Pricing accuracy was 58 per cent higher in diverse markets, and this gap was consistent in Texas and Singapore
- Prices were lower in the diverse markets, with no bubbles
- And traders made more pricing errors when surrounded by co-ethnics. Homogeneity, in short, made them overconfident.
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Interesting stuff.
And it goes on ….
‘Studies show female investors outperforming men’
- Groups of men behave differently and more responsibly when women are among us. Adding women should create a similar benefit in terms of diversity.
- But specific female characteristics make this all the more important
- Women are far less likely to suffer from overconfidence, and they tend to be more risk-averse
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Much more at that link.
