Why hiring traders who look like each other ends in disaster
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.
In the latest hiring roundup, HSBC is adding to its private banking unit, Deutsche Bank is expanding its corporate banking unit and US Trust shows impressive growth.
We asked a selection of current and ex-bankers (and one psychologist) for advice on bonus-maximization. This is what they said.
Goldman Sachs has fired a currency trader who was connected with the FX rate manipulation probe that has resulted in several banks being fined. Frank Cahill, who joined Goldman in 2012 after a stint at HSBC, was let go on Tuesday. It was at HSBC where he took part in the alleged rigging. Goldman Sachs has not been charged with anything related to the investigation.
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.
BNP Paribas is looking into whether some of its senior managers may have broken insider trading laws when they sold company shares ahead of the bank’s settlement with the U.S.
Goldman Sachs is back to hiring within its European asset-backed securities business after shrinking the unit several years ago.
Citigroup’s decision to focus only on its biggest clients led to the termination of five bond traders this week. The team, including managing director Michael Tofias, focused on smaller money management firms.
Buzz Around the Office
A Jacksonville Jaguars player was arrested for disorderly intoxication and trespassing after trying to pay for groceries with bubble gum.
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