(Bloomberg) -- Diversity safeguards populations from defectivegenes, stabilizes nature’s ecosystems and fosters innovation inbusiness.

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Now, Bloomberg Markets magazine will report in itsFebruary issue, research suggests that it may protect financialmarkets from manic excess. Bubbles form when traders trust others’judgment without scrutiny, and that happens more in ethnicallyhomogeneous markets, according to a new paper in the Proceedings ofthe National Academy of Sciences by Sheen S. Levine and David Starkof Columbia University.

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“You get better information processing in ethnically diversesettings,” Stark, a sociologist, says.

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To test their thesis, Stark and Levine created six-personminimarkets, some ethnically similar, others diverse. They chosetwo locales: Singapore, where they recruited Chinese, Malays andIndians, and Texas, where they tapped whites, blacks andLatinos.

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Each group traded fake stocks for real money for 10 rounds. Ineach round, the true value of the stocks depreciated by 10 percent.Prices should have fallen, too -- and, in the diverse groups,that’s what happened.

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Pricing accuracy

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But in the homogeneous ones, prices often stayed nosebleed highas traders willingly accepted bubble prices from theircounterparts. Pricing accuracy proved 58 percent higher in diversemarkets, the authors found. In Singapore, where almost all subjectshad taken an economics or finance class, it reached almost 90percent.

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We humans tend to let our guard down and go with the flow inhomogeneous settings, says Stark. We accept inflated offers andbecome more likely to spread others’ errors.

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“If there’s some diversity, you’re on your game,” he says.

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Levine and Stark’s findings also suggest that “crashes aresignificantly less severe” in diverse markets. Which could meanthat recent bubbles might have been even worse if finance weren’ttruly global.

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