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Groupthink: Collective Delusions in Organizations and Markets

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  • Roland Bénabou

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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14764.

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Date of creation: Mar 2009
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Publication status: published as Roland Bénabou, 2013. "Groupthink: Collective Delusions in Organizations and Markets," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 429-462.
Handle: RePEc:nbr:nberwo:14764

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Cited by:
  1. 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 79936, Verein für Socialpolitik / German Economic Association.
  2. Mauricio Drelichman & Joachim Voth, 2011. "Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1262, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Natalia T. Tamirisa & Prakash Loungani & Herman O. Stekler, 2011. "Information Rigidity in Growth Forecasts," IMF Working Papers 11/125, International Monetary Fund.
  4. Mauricio Drelichman & Hans‐Joachim Voth, 2011. "Lending to the Borrower from Hell: Debt and Default in the Age of Philip II," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(557), pages 1205-1227, December.
  5. 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.
  6. Marco LiCalzi & Oktay Surucu, 2012. "The Power of Diversity over Large Solution Spaces," Management Science, INFORMS, INFORMS, vol. 58(7), pages 1408-1421, July.
  7. Woodside, Arch G., 2012. "Incompetency training: Theory, practice, and remedies," Journal of Business Research, Elsevier, Elsevier, vol. 65(3), pages 279-293.
  8. Jonas Dovern & Ulrich Fritsche & Prakash Loungani & Natalia T. Tamirisa, 2013. "Information Rigidities in Economic Growth Forecasts," IMF Working Papers 13/56, International Monetary Fund.
  9. Jonas Dovern & Ulrich Fritsche & Prakash Loungani & Natalia T. Tamirisa, 2014. "Information Rigidities: Comparing Average and Individual Forecasts for a Large International Panel," IMF Working Papers 14/31, International Monetary Fund.
  10. 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.
  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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