A new study suggests that the lack of diversity on Wall Street could land the entire country in more financial hot water by creating more dangerous financial bubbles.
Financial bubbles tend to appear when traders overvalue their assets—stocks, bonds and other finances are assumed to be worth more than they actually are. When that bubble bursts, the results have the potential to create economic catastrophe. Prices drop exponentially, people lose unusually large amounts of money and the ensuing panic leaves a nation’s financial sanity hanging in the balance.
It’s happened here before and t’ll happen here again—unless Wall Street increases its workforce beyond the sea of white males who currently predominate, according to a recent study conducted by six professors and published on Monday by the Proceedings of the National Academy.
The Wall Street being dominated by white men means the group of homogenous traders are considered more likely to create a dangerous financial bubble than if people of diverse backgrounds came together to trade.
A 2013 study revealed that more than 80 percent of all the managers on Wall Street are white and more than half are men, according to the Huffington Post.
The study said it’s all about how comfortable people tend to be with one another and how much trust people put in others who remind them of themselves.
“Traders in ethnically homogenous markets are significantly less accurate, and thus more likely to cause price bubbles,” the report said after revealing that “pricing accuracy is 58 percent higher in diverse markets.”
It’s a remarkable finding in an industry that has traditionally paid scant attention to diversity. If it can be shown that a blindingly white workforce actually hurts the bottom line—and hurts the national economy as well—there might be more pressure placed on firms to train and hire non-white candidates.
The report said that people of diverse backgrounds are more likely to have some tension between employees, which encourages traders to be more skeptical of financial valuations.
As for non-diverse groups, it was less likely that the traders were willing to question one another and they were more likely to conform, regardless of how inaccurate the valuation may really be.
“The presence of more than one ethnicity fosters greater scrutiny and more deliberate thinking, which can lead to better outcomes,” the research paper said.
This is only the latest study to slam Wall Street’s lack of diversity and prove that its incredibly high barriers to entry for people of color and women are extremely problematic.
Studies in the past have found that many men in the financial market are often overly confident.
The studies suggest that by introducing more women, who tend to be more analytical about taking risks, the entire economy could see a boost.
There have been attempts to create legislation to regulate and encourage the hiring of people of color, but there doesn’t seem to be any evidence that these efforts have been effective.
