Groupthink: Collective Delusions in Organizations and Markets
AbstractI 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 InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7193.
Date of creation: Mar 2009
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Other versions of this item:
- Roland Bénabou, 2013. "Groupthink: Collective Delusions in Organizations and Markets," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 429-462.
- Benabou, Roland, 2013. "Groupthink: Collective Delusions in Organizations and Markets," IZA Discussion Papers 7322, Institute for the Study of Labor (IZA).
- Roland Bénabou, 2009. "Groupthink: Collective Delusions in Organizations and Markets," NBER Working Papers 14764, National Bureau of Economic Research, Inc.
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G01 - Financial Economics - - General - - - Financial Crises
- Z1 - Other Special Topics - - Cultural Economics
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