Why hiring traders who look like each other ends in disaster

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We may be able to add one more real business advantage to employing a diverse workforce, at least when it comes to banking. The financial bubble may not burst.

In an interesting new study covered by the New York Times, researchers trained 180 people with adequate finance backgrounds how to judge the value of imaginary shares of stock. They then began trading them amongst themselves, with the imagined profits being paid out in real cash to keep the game honest.

The study participants were cut up into two different types of groups: some were made up of all white people, others were ethnically diverse. The differences in how the “markets” operated were astounding.

In the ethnically diverse market, prices became 21% more accurate as judged by the fundamentals of the stock. Meanwhile, pricing accuracy in the homogenous markets went the other way. Prices were 33% less accurate than when the game began.

The main takeaway wasn’t shocking. People are more prone to trust others who look like them, hence the out-of-whack valuations. But how that played out in a virtual trading floor was interesting. Those in the diverse group who weren’t as trusting of others were more analytical in their approach. And they didn’t go along with the herd – something that happens too often on Wall Street that ends with short-term profits and, eventually, bailouts.

Surely it’s too simplistic to say that a more diverse workforce would eradicate all the bad behavior in banking, but any effort to eliminate blind faith in an opaque industry is certainly a worthwhile one.

“Ethnically homogenous bunches of traders are more prone to make big-time errors, so various things that promote ethnic diversity on Wall Street can actually create gains in market efficiency,” study author David Stark told the Times.

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Background Checks at UBS (Bloomberg)

Buried in this enormous article on UBS Chief Executive Andrea Orcel is this little fun fact: the Swiss bank has been conducting background checks on current employees at the managing director level and above. It’s now turning its attention to lower level staffers.

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Buzz Around the Office

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Quote of the Day: “What I would very much like to create is a real investment bank, the kind that there aren’t anymore.” – UBS Chief Executive Andrea Orcel on his plans for the bank

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