Thursday, November 27, 2014

Importance of racial diversity and persuasive power of graphs

Two interesting Upshot posts

1. The first article points to a new study that highlights the importance of racial diversity in trading rooms in preventing bubbles. They conducted trading simulations among groups of people with financial background and similar analytic capabilities to value imaginary stocks. Their finding,
We find that price bubbles are fueled by the ethnic homogeneity of traders. Homogeneity, we suggest, imbues people with false confidence in the judgment of co-ethnics, discouraging them from scrutinizing behavior. In contrast, traders in diverse markets reliably price assets closer to true values. They are less likely to accept offers inflated offers and more likely to accept offers that are closer to true value, thereby thwarting bubbles. This pattern is similar in Southeast Asia and North America, even if the two sites differ greatly in culture and ethnic composition, in what is implied by “ethnic diversity” and how it is operationalized...
we suggest that biases may stem not only from the limits of individual cognition, but also from the social context in which decisions are embedded. Homogeneity (or diversity) is not a feature of individuals, but of a collective: a team, a community, or a market... More broadly, homogeneity may play a critical role in herding—the convergence of people’s beliefs and behaviors through interaction—also known as (or related to) cascading, social contagion, peer effects, informational social influence, social proof, or institutionalization. If, as we find, markets populated by skilled traders possessing complete information are still so affected by homogeneity, it may have an even more pronounced role in other instances of herding, such as the spread of fashions, fads, false beliefs, and riots...
In our experiments, ethnic diversity leads all traders, whether of majority or minority ethnicity, to price more accurately and thwart bubbles. Ethnic diversity was valuable not necessarily because minority traders contributed unique information or skills, but their mere presence changed the tenor of decision making among all traders. Diversity benefited the market... Diversity facilitates friction. In markets, this friction can disrupt conformity, interrupt taken-for-granted routines, and prevent herding. The presence of more than one ethnicity fosters greater scrutiny and more deliberate thinking, which can lead to better outcomes.
In other words, diversity has an importance that goes beyond its moral imperative and is a positive contributor to improvement in collective performance. Just as an individual with a more diverse network of interactions and access to information is more likely to be successful, a more diverse group of people are likely to be more productive.

2. The second article points to a field experiment which highlights that graphical messages, by conveying the impression of scientific rigor, have a much greater persuasive power in conveying information than mere statements.
People who were given graphs or formulas along with claims regarding medication efficacy displayed greater belief in medication effectiveness. Such effects occurred for both graphs and chemical formulas, and for different populations: an online panel, a campus population, and a general population. The prestige of science appears to grant persuasive power even to such trivial science-related elements as graphs. Ostensibly, graphs signal a scientific basis for claims, which grants them greater credibility. This does not seem to be because graphs help cognitive processing. 
The effects of graphs hold even when no additional information is supplied or even implied by the graphs, and it is not moderated by increased understanding or retention of information. The effects of graphs are also not due to their visual nature—similar non-visual scientific signals also increase persuasion... It also appears that it is the general belief in science that is at least partly responsible for the persuasive power of graphs... Given that they signal scientific credibility, graphs have a greater effect for those who have faith in science. The effects of graphs on persuasion might exemplify a broader inferential process:

The information contains a graph (premise); Graphs signal a scientific basis (premise); Therefore, the information has a scientific basis (conclusion); A scientific basis indicates truth (premise); Therefore, the information is true (conclusion).
Furthermore, people who saw charts were found to be more likely to recall the results than those who read the text description. While this points to the power for graphs (and maps) in conveying information, it also highlights its potential of being abused to mislead people. 

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