Sheen S. Levine

Ethnic diversity deflates price bubbles

Significance Markets are central to modern society, so their failures can have devastating effects. Here, we examine a prominent failure: price bubbles. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. Using experimental markets in Southeast Asia and North America, we find a marked difference: Market prices fit true values 58% better in diverse markets. In homogenous markets, overpricing is higher and traders’ errors are more correlated than in diverse markets. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. Informing public discussion, our findings suggest that diversity facilitates friction that enhances deliberation and upends conformity. Markets are central to modern society, so their failures can be devastating. Here, we examine a prominent failure: price bubbles. Bubbles emerge when traders err collectively in pricing, causing misfit between market prices and the true values of assets. The causes of such collective errors remain elusive. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. In homogenous markets, traders place undue confidence in the decisions of others. Less likely to scrutinize others’ decisions, traders are more likely to accept prices that deviate from true values. To test this, we constructed experimental markets in Southeast Asia and North America, where participants traded stocks to earn money. We randomly assigned participants to ethnically homogeneous or diverse markets. We find a marked difference: Across markets and locations, market prices fit true values 58% better in diverse markets. The effect is similar across sites, despite sizeable differences in culture and ethnic composition. Specifically, in homogenous markets, overpricing is higher as traders are more likely to accept speculative prices. Their pricing errors are more correlated than in diverse markets. In addition, when bubbles burst, homogenous markets crash more severely. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. The evidence may inform public discussion on ethnic diversity: it may be beneficial not only for providing variety in perspectives and skills, but also because diversity facilitates friction that enhances deliberation and upends conformity.

TOWARDS A CONTINGENCY THEORY OF KNOWLEDGE EXCHANGE IN ORGANIZATIONS.

It is often presumed that knowledge exchange (or transfer) leads to distinctive advantages for firms. Amalgamating extensive qualitative data from knowledge-intensive sites and agent-based simulation, we model how individual agents, rather than organizational units or firms, search and exchange knowledge. We report the results of synthetic experiments, which propose moving away from the “more is better” approach to knowledge exchange towards a more contingent approach.

Mechanisms of Generalized Exchange: Towards an Integrated Model

Generalized exchange is a common practice with wide-ranging implications. Yet it remains a puzzle for theories of rational choice, social exchange, and evolutionary biology. Prior investigations focus on mechanisms developed or tested in isolation, and almost all assume that social preferences are homogenous. This article presents and tests an integrated model of generalized exchange that combines strategic reputation building, fairness-based selective-giving, the obligation to pay it forward, and heterogeneous social preferences (values). Using laboratory experiments, we show that each mechanism is robust: each has significant effects even when we include all four mechanisms in the model and control for other factors. However, some mechanisms have more influence than others, and different combinations of mechanisms yield a wide range of generalized exchange. Overall, generalized exchange is a collective result of people who strive to increase their resources, make decisions contingent on the visibility of their actions and on the behavior of others with whom they interact, reciprocate to a system from which they benefited, and behave consistently with their values. These values moderate how people respond to the presence or absence of reputational incentives, as well as the extent to which they reward generous behavior and punish stingy behavior.

Where and When Can Open Source Thrive? Towards a Theory of Robust Performance

While the economic impact of, and the interest in, open source innovation and production has increased dramatically in recent years, there is still no widely accepted theory explaining its performance. We combine original fieldwork with agent-based simulation to propose that the performance of open source is surprisingly robust, even as it happens in seemingly harsh environments with free rider, rival goods, and high demand. Open source can perform well even when cooperators constitute a minority, although their presence reduces variance. Under empirically realistic assumptions about the level of cooperative behavior, open source can survive even increased rivalry and performance can thrive if demand is managed. The plausibility of the propositions is demonstrated through qualitative data and simulation results.

Institutionalization in Efficient Markets: The Case of Price Bubbles

We seek to deepen understanding of the micro-foundations of institutionalization while contributing to a sociological theory of markets by investigating the puzzle of price bubbles in financial markets. We find that such markets, despite textbook conditions of high efficiency -- perfect information, atomistic agents, no uncertainty -- quickly develop patterns consistent with institutionalization processes.

Altruism in Cyberspace: The Voluntary Sharing of Goods On-Line

Some believe that people act in self-interest and have limited ability to cooperate, unless coerced by powers such as corporate supervisors or government officials. Others have challenged this view. An excellent opportunity to contrast these views is on the internet, which has enabled new venues for interaction and cooperation. Here I study an internet-based organization that facilitates the transfer (“sharing”) of digital goods. In this field setting I document altruistic behavior that is naturally occurring, intended, and stable. People contribute to a public pool of digital goods although they cannot identify the beneficiaries, do not expect direct reciprocity, do not gain from externalities, and know that free riding is frequent. Using participant observation, I describe the technological environment, the interaction and coordination that define the organization. Using interviews, I provide participants’ views on their own and others behavior. Analyzing the data, I hypothesize on the sources of such wide-ranging cooperation. I then consider several alternative explanations: low cost, gain from externalities, direct reciprocity, social norms, common pool resources, and Warm Glow. I show that none of these explains the phenomenon well, and argue for a more comprehensive theory of altruistic behavior. I conclude with recommendations for managers, especially those in companies that engage in electronic business or produce content that can be digitized.