Market BubbleRichard Duguay/Getty Images
KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to speak to Columbia [University professor] Sheen S. Levine.
When we look at innovation and creating new ideas, diversity is something that we value, but you have found that there is an interesting aspect about it that we haven't thought that much about before.
SHEEN S. LEVINE – So, Karl, markets today are central to what we do as humans. It's not only the place that we get our clothing and our food, but markets also play a role in providing health care, in predicting events, in providing employment. So we, as society, have a great need to ensure that markets perform well.
Unfortunately, markets sometimes misfire, they become sick, and one major sickness is price bubbles that, just in recent memory, have devastated national and the international economy. Now, price bubbles are a terrible thing but we don't really understand where they come from.
It is not surprising that some people make mistakes when they buy and sell things, but it is surprising that the market as a whole can go astray, that the market as a whole can misprice houses or any kind of asset – stocks. How does that happen? Now, we find that ethnic diversity plays an important role in predicting price bubbles. Ethnic diversity deflates bubbles and ethnic homogeneity increases bubbles.
KARL MOORE – Why do you think that is?
SHEEN S. LEVINE – We asked the same question and to study that – we can't study that in a real-life financial market because there are so many things that happen in the market; there is so much uncertainty. So, to study it in a clinical environment, we created an experimental market to which participants came and traded assets for real money. They had an interest in making money, so they made decisions that were as good as they could.
We isolated them from each other so they could not pressure each other into conformity, but we assigned them such that some participants were in markets that were completely homogeneous, which means that all of the traders were from the same ethnicity. Some of the other markets, we inserted people of other ethnicities.
And what we found was a marked difference in how well the markets performed. Markets that were composed of people of the same ethnicity, homogeneous markets, were much more likely to bubble than markets that were diverse.