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Groupthink: Collective Delusions in Organizations and Markets

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  • Roland Bénabou

Abstract

This article investigates collective denial and willful blindness in groups, organizations, and markets. Agents with anticipatory preferences, linked through an interaction structure, choose how to interpret and recall public signals about future prospects. Wishful thinking (denial of bad news) is shown to be contagious when it is harmful to others, and self-limiting when it is beneficial. Similarly, with Kreps--Porteus preferences, willful blindness (information avoidance) spreads when it increases the risks borne by others. This general mechanism can generate multiple social cognitions of reality, and in hierarchies it implies that realism and delusion will trickle down from the leaders. The welfare analysis differentiates group morale from groupthink and identifies a fundamental tension in organizations' attitudes towards dissent. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes. Copyright 2013, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 80 (2013)
Issue (Month): 2 ()
Pages: 429-462

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Handle: RePEc:oup:restud:v:80:y:2013:i:2:p:429-462

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Cited by:
  1. Woodside, Arch G., 2012. "Incompetency training: Theory, practice, and remedies," Journal of Business Research, Elsevier, Elsevier, vol. 65(3), pages 279-293.
  2. Drelichman, Mauricio & Voth, Hans-Joachim, 2009. "Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7276, C.E.P.R. Discussion Papers.
  3. Jonas Dovern & Ulrich Fritsche & Prakash Loungani & Natalia T. Tamirisa, 2013. "Information Rigidities in Economic Growth Forecasts," IMF Working Papers, International Monetary Fund 13/56, International Monetary Fund.
  4. Drelichman, Mauricio & Voth, Hans-Joachim, 2008. "Lending to the Borrower from Hell: Debt and Default in the Age of Phillip II," Economics working papers, Vancouver School of Economics mauricio_drelichman-2008-, Vancouver School of Economics, revised 06 Sep 2010.
  5. Marco LiCalzi & Oktay Surucu, 2012. "The Power of Diversity over Large Solution Spaces," Management Science, INFORMS, INFORMS, vol. 58(7), pages 1408-1421, July.
  6. Dovern, Jonas & Fritsche, Ulrich & Loungani, Prakash & Tamirisa, Natalia, 2013. "Information Rigidities in Economic Growth Forecasts: Evidence from a Large International Panel," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 79936, Verein für Socialpolitik / German Economic Association.
  7. Jonas Dovern & Ulrich Fritsche & Prakash Loungani & Natalia Tamirisa, 2014. "Information Rigidities: Comparing Average And Individual Forecasts For A Large International Panel," Working Papers, The George Washington University, Department of Economics, Research Program on Forecasting 2014-001, The George Washington University, Department of Economics, Research Program on Forecasting.
  8. Drelichman, Mauricio & Voth, Hans-Joachim, 2010. "Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain, 1566-1600," Economics working papers, Vancouver School of Economics mauricio_drelichman-2010-, Vancouver School of Economics, revised 04 Jul 2011.
  9. Muehlenbachs, Lucija & Staubli, Stefan & Cohen, Mark A., 2013. "The Effect of Inspector Group Size and Familiarity on Enforcement and Deterrence," Discussion Papers, Resources For the Future dp-13-36, Resources For the Future.
  10. Natalia T. Tamirisa & Prakash Loungani & Herman O. Stekler, 2011. "Information Rigidity in Growth Forecasts," IMF Working Papers, International Monetary Fund 11/125, International Monetary Fund.
  11. Jakob de Haan & David-Jan Jansen, 2011. "Corporate culture and behaviour: A survey," DNB Working Papers, Netherlands Central Bank, Research Department 334, Netherlands Central Bank, Research Department.

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