Groupthink: Collective Delusions in Organizations and Markets

By Roland Bénabou. Social Science Research Network, 2013

332 citations recorded by the source corpus.

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.

Subfields: Safety Research, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/07dc26138d9ee35423d452baca27199e10c9e3ba

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Citations in the corpus

Identity, morals, and taboos: beliefs as assets. (2011, background): “and Dickens [1982], Loewenstein [1987], Rabin [1995], Caplin and Leahy [2001], Landier [2000], Brunnermeier and Parker [2005]), Köszegi [2004]) and those in which they serve a more instrumental role (Carrillo and Mariotti [2000], Bénabou and Tirole [2002, 2006a], Battaglini et al. [2005], Dessi [200”
Errors in Probabilistic Reasoning and Judgment Biases (2018, unknown): “Bénabou (2013) proposed a model in which an agent can choose whether or not to process a signal that has been observed (i.e., to not pay attention to it, explain it away, or not think about it); if the agent gets anticipatory utility from putting high probability on the good state, then the agent…”
Credit Expansion and Neglected Crash Risk (2017, background): “Recent literature has proposed various mechanisms that can lead to such optimism, such as neglected risk (Gennaioli, Shleifer and Vishny, 2012, 2013), group think (Benabou, 2013), extrapolative expectations (Barberis, 2012), and this-time-is-different syndrome (Reinhart and Rogoff, 2009).”
The Demand for, and Avoidance of, Information (2015, unknown): “Benabou (2013) explores spillovers related to denial of bad news or information avoidance, identifying contexts in which such behaviors are likely to spread throughout a group of people.”
Wall Street and the housing bubble (2014, background): “In practice, our mid-level managers are mostly Vice Presidents, Senior Vice Presidents, and Managing Directors at investment banks, commercial banks, hedge funds, mortgage lenders, and other financial companies.”
How Does Social Media Impact Bitcoin Value? A Test of the Silent Majority Hypothesis (2018, background): “Third, the silent majority users are less likely to engage in groupthink [25], defined as self-deception, wishful thinking, and conformity to group values that lead to willful blindness and collective denial [3].”
The Future in Mind: Aspirations and Forward-Looking Behaviour in Rural Ethiopia (2014, background): “However, they may also lead to cognitive biases, neglect of relevant information and underinvestment (Hoff and Stiglitz, 2010; Gilovich et al., 2002; Bénabou, 2012; Hanna et al., 2012).”
The Economics of Motivated Beliefs (2015, background): “I formally show in Bénabou (2013) that such multiplicity (a positive measure of parameters s or c over which 1 i λ = is the best response to 1 i λ = and 0 i λ = the best response to 0 i λ = ) arises, independently of m, if and only if”
The Prevalence of the Disposition Effect in Mutual Funds’ Trades (2012, unknown): “” More recently Bénabou (2009) argues that groupthink might have been a contributing factor to corporate fiascos such as Enron, WorldCom, and the mortgagerelated financial crisis. Groupthink in the investment management process has long been acknowledged (see Forrestal (1988), Zeikel (1988), Fabozzi”
Psychology and the Financial Crisis of 2007-2008 (2011, background): “In particular, see Benabou (2009) for a formalization of ideas related to those I present here. For a discussion of the research in psychology on cognitive dissonance, see Kunda (1999) and Chapter 6 of Aronson, Wilson, and Akert (2005).”