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Ethnic Diversity: A Cure for Bubbles?

The Proceedings of the National Academy of Sciences has recently published an interesting article entitled Ethnic Diversity Deflates Price Bubbles. The basic insight of the article is that bubbles can be aided by population homogeneity and thwarted by ethnic diversity. Here is the article's significance statement:
Markets are central to modern society, so their failures can have devastating effects. Here, we examine a prominent failure: price bubbles. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. Using experimental markets in Southeast Asia and North America, we find a marked difference: Market prices fit true values 58% better in diverse markets. In homogenous markets, overpricing is higher and traders’ errors are more correlated than in diverse markets. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. Informing public discussion, our findings suggest that diversity facilitates friction that enhances deliberation and upends conformity.

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