Discussion Paper Details

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Title: Groupthink: Collective Delusions in Organizations and Markets

Author(s): Roland Bénabou

Publication Date: March 2009

Keyword(s): market crashes, psychology, anticipatory feelings, cognitive dissonance, groupthink, manias, market exuberance, morale, organizational culture, overconfidence, speculative bubbles and wishful thinking

Programme Area(s): Financial Economics, Industrial Organization, International Macroeconomics and Public Economics

Abstract: I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants' tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other's delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general "Mutually Assured Delusion" principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierachical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious "exuberance" can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations' attitudes toward free speech and dissent.

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Bibliographic Reference

Bénabou, R. 2009. 'Groupthink: Collective Delusions in Organizations and Markets'. London, Centre for Economic Policy Research.